MNI STATE OF PLAY: BOC Says Hikes Becoming More Data Dependent

Bank of Canada Governor Tiff Macklem said Wednesday he's becoming more dependent on the regular flow of data as the pandemic hit to the economy recedes and output returns to its full potential, while declining to say if hot inflation means undoing the half-point rate cuts made to manage deeper risks as the pandemic broke out.

“We went into this all of a sudden, suddenly the world was hit by the pandemic, that required a very rapid and very bold response,” Macklem said in response to a press conference question from MNI. “We have become more data dependent, we are assessing the diminishing degree of slack in the economy, and we are focused on bringing inflation sustainably back to target.”

The Governor also pointed out the more sequenced tightening of monetary policy, from the tapering of QE to a reinvestment phase and the current guidance for a rate hike in the middle quarters of next year if full output is restored and inflation stabilizes around the 2% target. The BOC made three 50bp rate cuts in March 2020 as the pandemic emerged. A former top government economist told MNI a half-point hike would send a stronger message about curbing the fastest inflation in decades.

“We are closely watching inflation expectations and wage costs. Keeping inflation expectations well anchored is key to getting inflation sustainably back to target,” Macklem said. Inflation for November of 4.7% is “clearly well above our target and above our 1 to 3% control range,” the job market has also made impressive gains in recent months and “the significant amount of slack that we did have in the economy is substantially diminished,” he said.

Inflation should fade towards 2% in the second half of next year as supply bottlenecks unwind, Macklem said. In an earlier speech he pledged to keep elevated global price pressures from becoming "embedded" into inflation. Trading in bankers' acceptances shows some bets that the policy rate will rise by 50bps by March.