MNI: BOC Says Rate Hikes Needed, Too Soon For Balanced Stance

Bank of Canada Governor Tiff Macklem said Thursday it's too soon to shift from forceful interest-rate hikes to a more balanced approach because there's little evidence trend inflation is slowing and a weaker currency is adding to broadening price pressures.

"There is more to be done. We will need additional information before we consider moving to a more finely balanced decision-by-decision approach," Macklem said about rate hikes in the text of a speech he's giving in Halifax, Nova Scotia, which will be followed by audience questions and a press conference.

The remarks push back against some investors betting that the most aggressive G7 central bank may need to pause hiking over the next few meetings as Canada's economy risks stalling out. The Bank has hiked 3 percentage points to 3.25% since March and investors expect another half point at its Oct. 26 decision and a quarter point in December. Some former advisers have told MNI that even a recession won’t deter the Bank because of the overriding need to pull inflation back to a 2% target.

Macklem's remarks focused on inflation broadening from global commodity prices to domestic products, companies passing on higher costs to consumers, and the heightened risk inflation expectations will become unhinged. The remarks made no reference to his previous argument about still having a narrow path to a soft landing or to re-evaluating policy as interest rates move beyond a neutral range seen from 2%-3%.

"We know we are still a long way from the 2% target. We know it will take some time to get there. We also know there could be setbacks along the way, and we can’t afford to let high inflation become entrenched," Macklem said.

The Governor also followed up on comments last month about Canada's dollar and inflation from his senior Deputy Carolyn Rogers, saying its depreciation "in the face of US-dollar strength will offset some of this global improvement by making US goods and vacations more expensive for Canadians." Those comments are a rare for a central bank that all but abandoned currency intervention around 1998.

Headline inflation slowed to 7% in August from 7.6% in July and June's four-decade high of 8.1%, but Macklem said it's "imperative" to bring it all the way back to 2%. "That’s welcome news, but inflation will not fade away by itself. To get it back to more normal levels, we need to slow spending in the economy so supply can catch up with demand," he said. Canada's economy "is clearly in excess demand," though there are signs growth is slowing as rate hikes helped cool an overheated housing market, Macklem said.

The Governor also reviewed problems in forecasting the inflation surge. The Bank will focus less on the "common" core inflation measure, one of the three it introduced in 2016, following some major recent revisions in that data.