With inflation showing no signs of slowing despite its highest level in more than 30 years, the head of the Bank of Canada has opened the door to bigger and faster rate hikes in an attempt to rein in the runaway rise in the Cost of life.
Speaking from Washington, DC on Thursday, where he was attending meetings of the International Monetary Fund and the World Bank Group as well as meetings of central bank governors and G7 and G20 finance ministers, the Bank of Canada Governor Tiff Macklem has not ruled out raising the central bank’s benchmark interest rate by 50 basis points or more at his next policy meeting in June.
Like most central banks around the world, the Bank of Canada cut its interest rate when the pandemic began in March 2020 in an effort to allay fears and ensure borrowing was as affordable as possible for encourage investment. Typically, central banks lower their interest rates to encourage borrowing and investment to stimulate a sluggish economy, and they raise rates to calm things down in a high inflation environment.
Two years after cutting borrowing costs to record lows, those record low rates have been blamed for contributing to inflation, which has hit its highest level in decades. In March, the Bank of Canada raised its benchmark rate by a tiny amount, 25 basis points or a quarter of a percent, to signal that the era of cheap loans was coming to an end.
Central banks prefer to move cautiously in either direction, moving rates in 0.25 percentage point increments when possible, so it was interesting to note that the bank followed that small uptick with a larger, by 50 basis points this month. That pushed the bank’s rate to 1%, still well below the pre-pandemic rate, but it was the first time in more than 20 years that the bank had risen so much in one fell swoop.
With Canada’s inflation rate at 6.7%, investors in financial instruments known as swaps suggest another sharp hike of half a percentage point at the bank’s next meeting in June. is almost certain. And there’s even a decent chance of having an even bigger one of 75 basis points or more.
“It could definitely happen,” Bank of Montreal economist Doug Porter told CBC News in an interview Friday. He noted that the next rate decision due in early June is over a month away and the bank will have a series of important data points by then, including another inflation figure for April.
“Why not consider…very unusual possibilities? Because we’re in a pretty exceptional situation here,” Porter said.
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Macklem did little to extinguish those speculative flames in his comments. Although CBC was unable to attend his virtual remarks and there was no transcript, Scotiabank economist Derek Holt quoted Macklem as saying he was “not going to rule anything out” in terms of the size of any rate hike. “We’re ready to be as forceful as it takes and I’m really going to let those words speak for themselves,” Macklem reportedly said.
Macklem also said continued supply chain disruptions, the war in Ukraine and the spike in COVID-19 cases in China will likely make high inflation last longer than expected. Earlier this month, the bank said it does not expect inflation to return to the 1-3% range it is targeting until the second half of next year.
“He also reiterated that a pause would only be considered once the policy rate was in the neutral rate range,” Holt said, referring to the level where interest rates reach a Goldilocks level where they don’t. neither stimulate nor slow down the economy. Most economists think of the so-called “neutral range” as a discount rate somewhere between 2 and 3%, well above its current level.
“There remains some inconsistency between saying they’re not on autopilot while saying they won’t stop until they hit a neutral range,” Holt said.
Canada is not alone in considering faster and larger rate hikes. Earlier Thursday, Federal Reserve Chairman Jerome Powell reiterated that a 50 basis point interest rate hike is possible in May, after a Fed member suggested a jump in 75 basis points cannot be ruled out, as inflation there is now at 8.5%. this is the highest level since 1982.
It wouldn’t be the first time the US Federal Reserve has advanced 75 points in living memory, having done so more than once since 1995.
“It’s not out of the realm of memory for some of us,” Porter said. “So I wouldn’t say it’s hugely unusual if they choose to go three-quarters of a percentage point.”