As inflation shows no signs of weakening, although it has reached its highest level in more than 30 years, the head of the Bank of Canada opened the door for larger and faster interest rate hikes to try to control the rapid increase of the cost of living.
Speaking from Washington, D.C., on Thursday, where he attended meetings of the International Monetary Fund and the World Bank Group, as well as meetings of central bank governors and G-7 and G20 finance ministers, the governor of the Bank of Canada Tiff McLeham did not rule out a 50-point or higher increase in the central bank’s reference interest rate at its 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 a bid to allay fears and ensure that loans are as affordable as possible to encourage investment. Central banks usually cut interest rates to encourage borrowing and investment to boost a slow economy, and raise interest rates to cool things amid high inflation.
Two years after cutting borrowing costs to as low as they once were, these record-breaking interest rates have been blamed for contributing to inflation, which has risen to its highest level in decades. In March, the Bank of Canada raised its key interest rate by a small amount, 25 basis points or a quarter of a percent, to signal that the era of cheap lending is coming to an end.
Central banks prefer to move cautiously in every direction, moving interest rates in 0.25 percentage points whenever possible, so it was remarkable when the bank followed this small increase of more than 50 basis points this month. This moved the bank’s interest rate to one percent, still well below pre-pandemic levels, but it was the first time in more than 20 years that the bank rose so much in one fell swoop.
With inflation in Canada at a staggering 6.7 percent, investors in financial instruments known as swaps have suggested that another large increase of half a percentage point at the bank’s next meeting in June is almost certain. And there’s even a decent chance of even more than 75 basis points or more.
“It can certainly happen,” Bank of Montreal economist Doug Porter told CBC News in an interview Friday. He noted that the next planned interest rate decision in early June is more than a month away and the bank will have a number of important data points between now and then, including another April inflation figure.
He says that since the Bank of Canada switched to fixed-rate decision-making days, it has never moved more than 50 points in both directions simultaneously, but with its highest inflation point since the bank began targeting inflation in the first place, it is very much in play.
“Why not look at … many unusual possibilities?” “Because we’re in a lot of circumstances here,” Porter said.
WATCH Inflation in Canada jumps to a 31-year high:
Inflation in Canada jumped to 6.7% in the biggest jump since 1991
Inflation in Canada jumped to 6.7% in March, reaching a 31-year high. Economists warn that borrowers should expect further interest rates to rise as the Bank of Canada tries to cool rising inflation. 02:00
Maclem did little to quell these speculative flames in his comments. Although the CBC was unable to attend to his virtual remarks and did not have a transcript, Scotiabank economist Derek Holt quoted McLam as saying he would “exclude nothing” about the size of any interest rate increase. “We are ready to be as strong as we need to be, and I will really let those words speak for themselves,” McLeham said.
Macklem also said ongoing supply chain disruptions, the war in Ukraine and the rise in COVID-19 cases in China are likely to keep high inflation on hold longer than expected. Earlier this month, the bank said it did not expect inflation to return to the range of one to three percent it targets by the second half of next year.
“He also reiterated that a pause will only be entertained once the political interest rate is in the neutral range,” Holt said, referring to the level at which interest rates reach the level of Goldilocks, where they neither stimulate nor restrain the economy. Most economists believe that the so-called “neutral range” is a bank interest rate of somewhere between two and three percent, well above its current level.
“There’s a bit of a mismatch between saying they’re not on autopilot, while saying they won’t stop until they’re in neutral,” Holt said.
Canada is not the only country considering raising interest rates faster and bigger. Earlier on Thursday, Federal Reserve Chairman Jerome Powell reiterated that a 50-point rate hike was possible in May after a Fed member suggested a jump of 75 basis points could not be ruled out, as inflation is now to 8.5 percent, the highest level since 1982.
The Bank of Canada may not have been so aggressive in living memory, but the US Federal Reserve did so by raising interest rates by 75 points in 1995.
“It’s not out of memory for some of us. So I wouldn’t say it’s so unusual if they choose to go by three-quarters of a percentage point,” Porter said.
Add Comment