MNI:BOC Still Prepared To Hike, Wants To Avoid Over-Tightening

Bank of Canada Governor Tiff Macklem said Wednesday he remains prepared to raise interest rates for an 11th time if needed as progress returning inflation to target has been slow and he wants to avoid going too far with the public already angry about the added pinch of high borrowing costs.

"The pain is real, and inflation is not going away by itself. That’s why it is so important that we stay the course and restore price stability. We have already come a long way," Macklem said in the text of a speech he's giving in Saint John, New Brunswick. "This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability. But if high inflation persists, we are prepared to raise our policy rate further.

Most of the remarks echoed views laid out in the Oct. 25 decision to hold the policy rate at the highest since 2001 at 5%. He added a review of the much higher and persistent inflation of the 1970s and said the mistakes of a half-hearted inflation fight can't be repeated. Speaking a day after the federal government introduced another five-year fiscal plan without a path back to balanced budgets, Macklem declined to repeat his view that spending across all levels of government is starting to add to inflation pressure by moving past the economy's 2% potential growth rate, but he also included lax fiscal policy as an example of a 1970s-style regret.

"The government and central bank weren’t willing to stay the course -- to restrain government spending and tighten monetary policy enough to wring inflationary pressures out of the economy. So Canadians lived with high inflation for more than a decade," Macklem said. The Governor noted back then the policy rate had to reach 21% to break the inflation spiral.

The current situation isn't nearly as drastic because of the Bank's swifter action this time and Canada's decades-long track record of bringing inflation back to the 2% target, he said. Investors see the Bank holding until the middle of next year before cutting, and Macklem's speech didn't lay out any time-frame or repeat the Bank's recent view that such a discussion can't happen without clear evidence price stability is being restored.

"Inflation has come down from its peak of 8.1%, but it’s still too high, and progress is slower than we’d hoped," he said. Statistics Canada on Tuesday said the CPI slowed to 3.1% from 3.8% and core indexes also slowed. The Bank has said 2% inflation won't return until sometime in 2025, and the Governor's speech said elevated near-term expectations have been slow to moderate. "This is a concern, and we want to see expectations decline to be reassured we are headed back to our 2% target," he said.

Rate hikes are cooling an "overheated" economy and growth will remain "weak for the next few quarters," Macklem said. The Bank's October forecast pointed to stagnating conditions by cutting the 2024 growth forecast to 0.9% from 1.2% while boosting the inflation forecast half a point to 3%.

"We don’t want to avoid one mistake only to overdo it on the other side. We are trying to balance the risk of over- and under-tightening," he said. "We’re well on our way, and we need to stay the course."