MNI: BOC Speech Drops Reference To Need For Rate Hike

Bank of Canada Governor Tiff Macklem's speech Tuesday dropped language about the potential need for raising interest rates an 11th time while reiterating the debate is shifting to how long to hold the highest borrowing costs since 2001 with inflation seen on a bumpy road back to target.

"More time is needed to let monetary policy do its work to relieve underlying price pressures. With continued evidence that monetary policy is working, Governing Council’s discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance," Macklem said in the text of a speech he's giving in Montreal, which is followed by audience and media questions. "We want to see inflationary pressures continue to ease and clear downward momentum in underlying inflation."

While those statements are in line with the Jan. 24 decision to hold the key rate at 5%, the speech dropped a reference to potentially hiking again if inflation veers off course.

Other parts of the remarks highlighted progress on high global inflation that brings policy targets within sight and potential for more conflicts that could drive up transport and energy costs. Domestic inflation also faces some upside pressure from shelter costs amid a housing squeeze, which Macklem noted that like global commodities prices monetary policy has much less control over. 

"Putting this all together, the resulting push and pull on inflation means the path back to 2% inflation is likely to be slow and risks remain. Our forecast has inflation staying close to 3% through the first half of this year before declining to around 2.5% by year-end, and to the 2% target in 2025," he said. 

While economic growth is seen as weak in the near term even after StatsCan's flash estimate for annualized growth of 1.2% in the fourth quarter, Macklem also again noted some risk from disappointing productivity growth. With recent wage gains doubling the Bank's inflation target, that mismatch could suggest future loops of wage and price inflation. 

At a time when price gains have exceeded the the Bank's target for almost three years much of Macklem's speech defended the power of monetary policy to meet the target over the medium term. Looking back decades to the origins of inflation targets in the early 1990s and through the 9-11 terror attacks and the 2008 global financial crisis, Macklem said monetary policy missteps were more around timing than fundamental flaws. 

Policy worked even in the swings of the pandemic he said, acknowledging that as the economy re-opened "we probably could have begun withdrawing stimulus sooner." Even that would not have avoided "much of the post-pandemic inflation," he argued.