Governor of the Bank of Canada Typh McClem, before appearing before the Standing Committee on Finance of the Ottawa House of Commons on April 25. Sean Kilpatrick / The Canadian Press
The Bank of Canada is ready to raise interest rates “forcibly if necessary” to curb inflation, Governor Typh McLem said on Wednesday, doubling the message that Canadian households and businesses need to prepare for higher borrowing costs next year. year.
Speaking to the Senate Committee on Banking, Trade and Trade, Mr McLem said the central bank needed to raise interest rates relatively quickly to cool the Canadian economy overheating. At the same time, he acknowledged that his team will follow a thin line as it tries to cut demand in the economy without causing a recession.
“If it goes down, the economy overheats, it creates internal inflationary pressures,” Mr MacLeom said during his second parliamentary term this week. He addressed the Finance Committee of the House of Commons on Monday.
“We need to cool growth to cool inflation. We do not want to overcool the economy, but we do not want it to overheat and create inflation. So yes, it will be delicate, “he said.
Another speech to parliament comes as the central bank continues its fastest cycle of tightening monetary policy in decades in a bid to cope with rising consumer prices, which peaked at 6.7% in March. It has raised its base rate twice in the last two months, including an excessive movement of 50 basis points in mid-April, bringing the interest rate to 1%.
Mr McLem reiterated on Wednesday that the bank is likely to consider another 50 basis point interest rate increase for its upcoming meeting on June 1st. It usually moves in steps of a quarter point.
The bank’s campaign to normalize borrowing costs after two years of extremely accommodative monetary policy still has a long way to go. Mr Maclem has said several times in recent weeks that the bank intends to return overnight interest rates between 2 and 3 percent relatively quickly. How fast and how high interest rates move will ultimately depend on how the economy reacts.
The big challenge for the central bank is to cool the Canadian economy enough to bring demand in line with the country’s supply without causing a recession. Mr Maclem acknowledged the risk, but noted that the bank forecasts relatively strong growth of 4.2% this year and 3.2% next year.
“I have no doubt that things will not turn out exactly the way we forecast, they never happen. But there is a lot of room for this amount of solid growth … Even if the growth was a little weaker, it is far from negative, “he said.
Loan spending on Canadian households has already begun to rise, with variable-rate mortgages moving in line with the bank’s interest rate and fixed-rate mortgages – which track government bonds – rising as bond investors began to priced in a more aggressive way of raising interest rates by the central bank.
Increased household debt in Canada may limit how aggressive a bank can be in increasing borrowing costs. Canadian households took out another $ 187.5 billion in mortgage debt last year and $ 118.9 billion in 2020, well above pre-pandemic levels. This led to a record high ratio of household debt to disposable income by the end of 2021.
Economists at the Royal Bank of Canada estimate that if the Bank of Canada’s reference rate for overnight returns to 2 percent, the average debt repayment of Canadian households will increase by about $ 2,000 next year.
Mr McLem said he hoped inflation would start to slow later this year as global commodity prices rose and higher interest rates began to cool the local economy. But he acknowledged that the outlook for inflation remains opaque.
“Where is the war? [in Ukraine] will i go How will COVID develop in China? These are fundamental uncertainties, “he said.
Your time is precious. The Top Business Headlines newsletter is conveniently delivered in its inbox in the morning or evening. Register today.
Add Comment