Targeting high inflation is the Bank of Canada’s top priority, and it’s prepared to raise interest rates “forcefully” if that’s what’s needed.

Bank of Canada Governor Tiff Macklem made the comment in a speech before the Senate Committee on Banking, Trade and Commerce on Wednesday.

“The economy needs higher rates and can handle them. With demand starting to run ahead of the economy’s capacity, we need higher rates to bring the economy into balance and cool domestic inflation,” he said.

Macklem noted that inflation is now at a three-decade high of 6.7%, and is expected to remain above the Bank’s target range of 1% to 3% for the remainder of the year.

“We are committed to using our policy interest rate to return inflation to target and will do so forcefully if needed,” he added. “How high rates go will depend on how the economy responds and how the outlook for inflation evolves.”

What is certain, Macklem noted, is that Canadians should “expect interest rates to continue to rise toward more normal settings.”

Bank considering a 50-bps rate hike in June: Macklem

Macklem’s comments before the Senate committee come just days after he told a parliamentary hearing that the Bank of Canada will consider a half-point rate hike at its next rate meeting.

“We’ve signalled very clearly Canadians should expect further increases,” he told lawmakers on Monday. “Looking ahead to our next decisions, I expect we will be considering taking another 50-basis-point step.”

While it’s the first time Macklem has hinted specifically at the size of future rate movements, it’s not news to markets, which are already fully priced in for a 50-bps rate hike on June 1.

That would take the overnight target rate to 1.5%. The bond market is pricing in a lower probability of a 75-bps rate hike, though it is possible.

Scotiabank economist Derek Holt referenced such a move in a previous research note.

“The fact that inflation is running amok should drive a minimum 50-bps hike that we forecast at the next meeting in June,” he wrote. “There is even a solid case for the BoC to hike by 75–100bps in one shot.”

These forecasts are in stark contrast to market guidance the BoC delivered in late 2020 when it assured borrowers rates would remain low until economic slack was absorbed, which it said wasn’t likely to happen until “into 2023.”

While the odds of a 75-bps rate hike in June have since diminished since March inflation data was released, it remains at about a 30% chance, according to markets.

“I’m not going to rule out other options, but anything bigger than 50 basis points would be very unusual,” Macklem said.

Latest rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

Photographer: Justin Tang/Bloomberg via Getty Images

Bank of Canada inflation interest rates rate outlook tiff macklem

Last modified: April 28, 2022