Bank of Canada must stay the course to combat risk of sticky inflation, Governor Tiff Macklem says - The Globe and Mail

Bank of Canada governor Tiff Macklem holds a press conference at the Bank of Canada in Ottawa on Wednesday, April 12, 2023.Sean Kilpatrick/The Canadian Press

The Bank of Canada is “staying the course” to combat the risk of inflation getting stuck above 2 per cent, Governor Tiff Macklem said Thursday, in a mildly hawkish speech that suggested the central bank intends to keep interest rates high even as inflation declines quickly.

At the same time, he warned that instability in the U.S. banking system could spill across the border and impact the path of Canadian monetary policy – although he said this is not the bank’s base-case scenario.

The central bank halted its rate-hike campaign in March and has kept its benchmark interest rate steady at 4.5 per cent since then. Despite the pause, central bank officials have maintained a hawkish tone. They have said they could raise interest rates again if needed, and have pushed back on market expectations that the bank will cut rates later this year.

The annual rate of inflation has declined steadily since last summer, and the central bank expects it to return to 3 per cent in the coming months. Still, Mr. Macklem and his team remain concerned that getting all the way back to the bank’s 2 per cent target could prove a long and difficult process.

“For services price inflation to slow enough for overall inflation to get back to the 2 per cent target, several things still need to happen: the labour market needs to rebalance, corporate pricing behavior needs to normalize, and near-term inflation expectations need to come down further,” Mr. Macklem said in a speech to the Toronto Region Board of Trade.

“There is a risk that these adjustments will take longer or stall, and inflation will get stuck materially above the 2 per cent target.”

The bank’s governing council considered raising its policy rate at its most recent rate decision on April 12, but decided to stand pat. Interest rate increases work with a considerable lag, and Canada’s central bankers have said they want to wait to see if interest rates are now high enough to bring inflation down over time.

Mr. Macklem used his speech to address recent financial instability in the United States and Europe. Several mid-sized U.S. banks have failed over the past two months, including First Republic Bank, which was taken over by the Federal Deposit Insurance Corporation and sold off to JPMorgan Chase & Co. earlier this week.

So far Canadian banks have remained relatively isolated from the international banking turmoil, Mr. Macklem said. Although he said the central bank was monitoring the situation and remained prepared to step in and stabilize markets if needed.

“If global financial stress were to re-emerge and prove more pervasive, the spillover effects into Canada could be more significant. In addition, global stress could interact with domestic vulnerabilities related to high household indebtedness and the potential for a more pronounced contraction in the housing market,” he said.

The possibility of a broader financial crisis remains a key downside risk to the central bank’s inflation forecast, Mr. Macklem said.

“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,” he said.

Adblock test (Why?)

https://news.google.com/rss/articles/CBMieGh0dHBzOi8vd3d3LnRoZWdsb2JlYW5kbWFpbC5jb20vYnVzaW5lc3MvYXJ0aWNsZS1iYW5rLW9mLWNhbmFkYS1tdXN0LXN0YXktdGhlLWNvdXJzZS10by1jb21iYXQtcmlzay1vZi1zdGlja3ktaW5mbGF0aW9uL9IBAA?oc=5

2023-05-04 17:32:13Z
2000389391