MNI: BOC Would Consider Persistent Market Strain For Rate Path

Bank of Canada Governor Tiff Macklem says he would only consider adjusting the path of interest rates in response to persistent market tightening and highlighted there are other tools that could be used first, while emphasizing the main focus remains a potential rate hike if inflation gets stuck well above the 2% target.

Macklem says his country is seeing little spillover from the recent collapse of U.S. lenders, while there is a longer list of inflation risks including rapid wage gains, some elevated price expectations and companies aggressively boosting prices. The remarks are still the most significant to date on how bank failures abroad might contribute to the major downside risk of a serious global recession.

"We have separate mandates and separate tools for price stability and financial stability. So we can work to achieve both at the same time," Macklem told the Toronto Board of Trade Thursday, remarks that will be followed by audience discussion and a press conference. "If financial stress were to lead to more tightening than expected and if this were to persist, we would need to take this into consideration as we set the policy rate to achieve our inflation target."

The financial system "needs to adjust to higher interest rates" that are needed to re-balance an overheated economy, Macklem said. While inflation will likely slow to 3% in the next few months, the last move back to target appears more difficult and uncertain even with some of the restraint of the Bank's eight hikes yet to filter through the economy. "If we start to see signs that inflation is likely to get stuck materially above our 2% target, we are prepared to raise rates further," Macklem said.

The Bank last month held its key rate at 4.5% for a second meeting and its continued talk of hikes has led some investors to stop betting on a rate cut later this year. Officials have also discussed the prospect of holding rates at a peak for longer as another way to cool inflation. 

"I’m not here to talk to you about the journey from 8% to 4% or even 3%. I’m here to talk about staying the course to price stability and getting the rest of the way back to the 2% target. Monetary policy still has work to do," Macklem said. Canada's March inflation was the slowest since August 2021 on gasoline and a weak housing market, fading to 4.3% from 5.2%.