Sticky inflation would ensure ‘much higher’ interest rates, BoC’s Macklem warns – National
The Bank of Canada rapid fire interest rate The hikes are starting to slow the economy, its governor said on Monday, and even if the bank wants to avoid a recession, the risk is sticky. inflation will demand “much higher” rates.
Governor Tiff Macklem told Vancouver business leaders that the clampdown was “starting to work” but that it would take time to fuel the economy.
The bank raised the rate by a record 400 basis points in nine months to 4.25 percent — the last level seen in January 2008 — to tame inflation that stood at 6.9 percent in October. This is more than three times of the central bank two percent target.
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Going forward, the challenge is that raising rates too much would risk pushing the economy into an “unnecessarily painful recession.” Not raising them enough would allow price increases to remain high and fuel expectations of persistently high (or sticky) inflation.
“With inflation above target, this is the bigger risk,” Macklem said. “If inflation remains high, much higher interest rates will be needed to restore price stability, and the economy will have to slow down even more.”
After last week’s 50 basis point hike, the bank said it would monitor economic data to determine whether rates should rise further, adding that it would move forcefully if necessary.
“Decisions to raise rates or pause and assess the impact of past rate hikes will depend on incoming data and our views on inflation expectations,” Macklem reiterated on Monday.
Reflecting on a year in which prices rose to near four-decade highs, Macklem said the bank was surprised by supply problems that are more persistent than expected, Russia’s invasion of Ukraine and a surge in demand after COVID-19. restrictions were eased which prompted businesses to quickly raise prices.
Macklem also said future supply chains could be more resilient if they were shorter and more diversified, but less efficient, which could make the job of keeping inflation within the two percent target more difficult.
“Looking at the long term, it seems that the disinflationary forces that we have had in the last 30 years will not be the same. These potential developments could make it difficult for inflation to return to the two percent target and stay there,” Macklem said.
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