As Inflation Rises Higher, Macklem Doesn’t Rule Out A Large Rate Hike

With inflation showing no signs of abating despite reaching its highest level in more than 30 years, the Bank of Canada’s head has opened the door to bigger and faster rate hikes to try to curb the runaway 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 G7 and G20 central bank governors and finance ministers, the Governor of the Bank of Canada, Tiff Macklem did not rule out raising the central bank’s benchmark interest rate by 50 basis points or more at his next policy meeting in June.

Like most of the world’s central banks, the Bank of Canada cut its interest rate when the pandemic began in March 2020 in a bid to allay fears and ensure loans were as affordable as possible to encourage investment. Central banks typically lower their interest rate to encourage borrowing and investment to stimulate a sluggish economy, and raise rates to cool things down amid high inflation.

Two years after cutting borrowing costs to their lowest level ever, those record rates have been accused of contributing to inflation, which has risen to its highest level in decades. In March, the The Bank of Canada raised its benchmark rate by a small amount25 basis points, or a quarter of a percentage point, 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 where possible, so it was notable when the bank followed that small increase with one higher, 50 basis points this month. That moved the bank’s rate to one percent, still well below where the rate was before the pandemic, but it was the first time in more than 20 years that the bank raised that much at once.

With Canada’s inflation rate at a dazzling 6.7 percentInvestors in financial instruments known as swaps suggest another big half-percentage-point hike at the bank’s next meeting in June is almost certain. And there’s even a decent chance of an even higher 75 basis points or more.

“It certainly could happen,” Bank of Montreal economist Doug Porter told CBC News in an interview on Friday. He noted that the next planned rate decision in early June is more than a month away, and the bank will have a host of important data points between now and then, including another inflation number for April.

“Why not consider … very unusual possibilities? Because we’re in a pretty rare circumstance here,” Porter said.

SEE | Canada’s inflation jumps to 31-year high:

Canada’s inflation rate soars to 6.7%, biggest jump since 1991

The inflation rate in Canada jumped to 6.7 percent in March, hitting a 31-year high. Economists are warning borrowers to expect more interest rate hikes as the Bank of Canada tries to cool rising inflation. 2:00

Macklem did little to douse those speculative flames in his comments. Although the CBC was unable to attend virtual remarks from him and there was no transcript, Scotiabank economist Derek Holt quoted Macklem as saying he “wouldn’t rule anything out” in terms of the size of any rate hike. “We’re prepared to be as aggressive as it takes and I’m really going to let those words speak for themselves,” Macklem said.

Macklem also said continued supply chain disruptions, the war in Ukraine and rising COVID-19 cases in China are likely to make high inflation last longer than anticipated. Earlier this month, the bank said it does not expect inflation to return to the 1-3 percent range it is targeting until the second half of next year.

“He also reiterated that a pause would only be considered once the benchmark rate is in the rate-neutral range,” Holt said, referring to the level at which interest rates reach a Goldilocks level where they don’t stimulate the economy does not retain it. Most economists think that the so-called “neutral range” is a bank rate of between two and three percent, well above its current level.

“There’s still some inconsistency between saying they’re not on autopilot and saying they won’t stop until they get to a neutral range,” Holt said.

Canada is not the only country considering faster and larger rate increases. Earlier Thursday, Federal Reserve Chairman Jerome Powell reiterated that a 50 basis point interest rate hike in May is possible, after a Fed member suggested a 75 basis point jump cannot be ruled out. basis points due to inflation. now up to 8.5 percentit is the highest level since 1982.

It wouldn’t be the first time the US Federal Reserve has moved 75 points in living memory, having done so more than once starting in 1995.

“It’s not out of the realm of memory for some of us,” Porter said. “So I wouldn’t say it’s that unusual if they choose to go for three quarters of a percentage point.”

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