Governor of Bank of Canada says more interest rate hikes are needed to curb inflation – National

Signs that show the world inflationary The pressure that is easing is not enough to hold back the future interest rate spiked when the national economy was still running too hot, Bank of Canada leading policymakers said.

Tiff Macklem said in a speech Thursday to the Halifax Chamber of Commerce that even as inflationary pressures extend beyond Canada’s borders such as high global shipping prices and supply chain concerns ease, sources increase in domestic prices as demand for services remains too hot.

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The annual inflation rate reached 7.0% in August According to Statistics Canada, as gasoline costs continue to fall, although food prices continue to rise, touching a 41-year high.

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Macklem also said that increased demand for travel and entertainment after the end of COVID-19 restrictions has fueled inflation.

Those forces have helped keep the Bank of Canada’s key indicators of inflation at bay even as headline numbers from Statistics Canada slowed for two months in a row.

“When combined with expectations that short-term inflation remains high, the implication is clear that further rate hikes are warranted. Simply put, there is more work to be done,” Macklem said Thursday.

The Bank of Canada, as an institution, and in particular Macklem have been targeted in recent months for the leadership of the federal Conservative Party. Pierre Poilievrewho charged the central bank in triggering the Liberal government agenda and contributed to rampant inflation.

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During his leadership campaign, Poilievre said he would fire Macklem from his post If he becomes prime minister, a proposal that has received backlash in turn is disrespectful to the independence of the institution.

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Global country manager Dawna Friesen asked Macklem in an interview after his speech on Thursday about his reaction to the Conservative Party leader.

The governor told Friesen that central bank independence was the reason the central bank was able to “stabilize prices” and control inflation – a task he was adamant about in his comments today. Thursday that the Bank of Canada will be able to complete.

“I can tell you, I go to work every day, that’s my focus. Inflation is hurting Canadians. The best way to protect Canadians from high inflation is to get rid of it.”

How high will the interest rate be?

The Bank of Canada’s policy rate is currently at 3.25%, after up 0.75 percentage points on September 7th.

The central bank’s benchmark rate has rallied three percentage points after five consecutive increases since March, which Macklem acknowledged on Thursday as “one of the strongest and fastest tightening cycles we’ve ever seen.” conduct”.

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CIBC chief economist Avery Shenfeld said in a note to clients on Thursday that Macklem’s speech “has a rather hawkish bias,” implying a more positive stance on monetary policy.

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The central bank signaled back in September that further rate hikes would be needed to rein in inflation. But Shenfeld said Macklem’s comments mean the next rate decision on October 26 “remains a lock” for a half-percentage point increase and a pause after that is unlikely.

National Bank Financial (NBF)’s Warren Lovely and Taylor Schleich said in a note that they also expect a move larger than the standard 25 basis point step later this month, with policy rates ending the year. “not less than” four percent.

NBF economists say that Macklem’s tone is reminiscent of recent speeches by US Federal Reserve Chairman Jerome Powell, who gave promise more “pain” will come in an effort to curb inflation south of the border.

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Indeed, Macklem is adamant that as the labor market remains tight and wages are starting to rise, Canada’s economic growth must slow to give supply time to catch up with pent-up consumer demand. .

“This will help ease price pressures in Canada,” he said.

Weak Canadian Dollar Boosts Inflation

When asked if he believes Canada will weather the recession, Macklem said a recession can be avoided but acknowledged there are many factors that could complicate those efforts.

Global supply chain problems persist with pandemic-related shutdowns in China, continuing war in Europe and inflation that could prove “difficult” at home, he said. cited as ongoing issues the bank is monitoring.

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“There is a road that leads to a gentle landing, but it is a narrow road and there are risks,” he said.

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“How high interest rates need to go … really depends on how inflation and the economy reacts.”

One such inflationary pressure is the relative weakness of the Canadian dollar against the US greenback.

Usually, when a country’s central bank raises interest rates, the national currency appreciates as investors are incentivized to hold that denomination.

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But in reality, the Canadian loonie – like most of the world’s currencies – fell in value later this year due to the dominant strength of the US dollar. The Canadian dollar was at a more than two-year low of 73 cents against the US dollar on Thursday.

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That raises the price of imports from the US and weakens the purchasing power of Canadians who travel south in the winter, contributing to inflation.

Macklem said Thursday that the lagging loonie means “there will be more work to be done on interest rates.”

Consider the question of salary

In Thursday’s speech, Macklem continued to try to set inflation expectations in the near- and long-term, pledging the central bank would fulfill its mandate to bring price growth back to its 2% target.

Speaking from Halifax, he alluded to the rebuilding efforts underway following the devastation from Hurricane Fiona to give the Bank of Canada’s own campaign determination.

“Atlantic Canadians will rebuild after this storm as they always do. And the Bank of Canada will control inflation as it has for the past 30 years. We are steadfast in our commitment to restoring price stability for all Canadians,” he said.

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Inflation expectations are an important part of the fight against inflation. As consumers and employers’ expectations for inflation become “uncontrolled,” they begin to demand higher wages to offset the impact, which then pay back as business returns. industry passes costs on to the end user.

Macklem explains that the “wage price spiral” is the worst-case scenario for the Bank of Canada and will require much higher interest rates to fix.

“Once you get into the wage-price spiral, it’s too late,” he said.

But when Macklem preached this to business leaders and warned them not to raise wages too much amid the inflation war, some accused the central bank governor of overstepping the bounds. and disrupt collective bargaining.

When the governor spoke to the Canadian Federation of Independent Business (CFIB) in July, he warned attendees not to include current levels of inflation in long-term wage contracts.

The Canadian Labor Congress addressed the issue – president Bea Bruske said in a statement last month that she is “deeply concerned about the Bank’s preoccupation with encouraging companies to reduce wages, at a time when so many workers are struggling to make ends meet”.

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Macklem was asked about his salary message on Thursday. He insists that he will let businesses decide on wages and let workers decide what wages they are willing to accept.

But he said his guidance was not to include high levels of inflation in long-term discussions about wages.

“What I’ve been saying to workers, what I’ve been telling businesses, is when you make your decisions, don’t take inflation into account,” he said.

“Inflation is falling, workers and businesses can count on it.”

– with files from Reuters

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