From transitory to forcefully, Canada’s central bank now believes it must act aggressively to tackle high inflation. Bank of Canada (BoC) Governor Tiff Macklem acknowledged some mistakes interpreting inflation. Speaking to lawmakers, he explained they are working to correct the issue. Canada’s economy has recovered and moved into excess demand, allowing them to pursue higher interest rates. Much higher interest rates if stubborn inflation won’t fall, and requires forceful action.
The Bank of Canada Made “Some Mistakes,” Says Governor
The BoC made a few mistakes addressing inflation and they’re working on the issue. That was the message from the Governor, when asked if the BoC is behind the curve and would have handled things differently in hindsight. He further explained they’re responding to those mistakes by aggressively raising interest rates.
“Look, we got a lot of things right. We got some things wrong,” said Governor Macklem. “And we are responding. You saw that a couple of weeks ago. We raised the policy rate. Took the unusual step of raising the policy rate by 50 basis points to 1%. We’ve signaled very clearly that Canadians should expect further increases and look ahead to our next decisions. You know, I think we will be considering taking another 50 basis point step.”
Canada’s Economy Has Recovered and Shows Excess Demand
Canada’s economy is booming and will support elevated rates to cool high inflation. The Governor stressed that Canada’s economy is now very strong and fully recovered. Inflation is higher than expected and will persist longer than previously thought. It’s no longer a transitory issue, but the economy has moved into a period of excess demand.
“We need higher rates,” he bluntly explained. “Our policy interest rate is our primary tool to keep the economy in balance and bring inflation back to the 2% target. Two weeks ago, we raised our policy rate by 50 basis points to 1%, and we indicated Canadians should expect further increases.”
Bank of Canada Sees Inflation As A Threat and Will Act Forcefully
Did we mention the BoC sees interest rates higher? Let’s do it one more time since that was a key message from the Governor. For the third time this year, the BoC used the term “forcefully” to describe the actions they’re ready to take. If needed, they’re prepared to raise the overnight rate above neutral, intentionally slowing the economy.
The sky’s the limit on how high interest rates will rise. Elevated inflation is a significant risk that’s difficult to navigate. High inflation erodes the value of money faster and drives investment away. Most importantly, these issues are felt strongest by the vulnerable. The BoC has acknowledged those most impacted are low income households and pensioners
Governor Macklem reiterated only inflation has a target, not the overnight rate. Interest rates can rise as high as needed to knock out excess demand in the economy. We might not require rates to hit the neutral rate if inflation begins falling sooner. Though with the BoC forecasting elevated inflation until 2024, its warning of going past the neutral rate is more likely.