Having already raised interest rates by 300 basis points this year, the Bank of Canada’s Tiff Macklem confirmed on Thursday that additional rate hikes (plural form) are “warranted.”
In a prepared speech delivered at the Halifax Chamber of Commerce, Macklem said the Bank has yet to see clear evidence that underlying—or “core”—inflation is coming down.
“When combined with still-elevated near-term inflation expectations, the clear implication is that further interest rate increases are warranted,” he said. “Simply put, there is more to be done.”
Additionally, he said labour conditions remain “very tight,” wage growth is rising, and the economy remains in excess demand. “We will need additional information before we consider moving to a more finely balanced decision-by-decision approach,” he said.
Observers took the comments as hawkish and a signal that the Bank isn’t likely to pivot to a more dovish stance at its upcoming rate meeting on October 26 as some had expected.
“There had been a narrative offered in the market that October’s hike would be one more and done with a coming dovish pivot,” wrote Scotiabank economist Derek Holt. “That narrative got flushed today.”
“With less than three weeks to go before the next decision on October 26…the Governor is clearly not thinking that the October communications will involve a dovish pivot versus a largely preset path to keep hiking thereafter,” he added.
A terminal rate of at least 4% is growing more likely
With the benchmark lending rate currently at 3.25%, there are growing expectations that the Bank of Canada’s terminal rate for this tightening cycle will be 4%, if not higher.
“If the BoC hikes 50+ [bps] this month and is signalling the plural form of rate hikes still lies ahead, then markets are probably correct in pricing a terminal rate over 4%,” Holt wrote.
Bond markets are currently pricing in equal odds of a 25-bps or 50-bps rate hike later this month, but Macklem’s comments could start to tip the scale towards the latter.
“The hawkish nature of this speech affirms our expectations that another large move (i.e., greater than 25 bps) on October 26 looks to be in the offing,” noted economists from National Bank of Canada. “The tone here would presumably be consistent with continued tightening in December, where we see the policy rate at no less than 4%.”
Earlier this week, the Organisation for Economic Co-operation and Development (OECD) released its latest economic outlook, where it forecasts the Bank of Canada’s benchmark rate to reach 4.5% in 2023.
“Further policy rate increases are needed in most major advanced economies to ensure that forward-looking measures of real interest rates become positive and inflation pressures are reduced durably,” the report reads. “This is likely to involve a period of below-trend growth to help lower resource pressures.”
Featured image by Horacio Villalobos, Corbis/Corbis via Getty Images
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Last modified: October 7, 2022
No. Not “warranted”. NECESSARY.
Has anyone asked Macklin how long it takes for an interest rate hike and it’s effects on the economy take to work through the system? To show results? By the time this man stops raising rates, he will have put Canada into a severe recession. BOC will be cutting interest rates before the last rate increase has even worked through to further hurt Canadians.
There will be no “Soft Landing” until this man wakes up…. Or gets replaced!
The higher and faster the BOC raises rates, the sooner and more severe will it have to cut rates in 2023. Look back at history. Every time the BOC has raised rates this aggressively without waiting for results, it has had to start cutting to get the country out of a BOC caused recession. Canada needs intelligence, foresight and someone Pro-active at the head of the BOC. Instead we have and blind man who can only react, to his own mistakes.
Does Tiff Macklem have any concept of how these shameful increases in interest rates are bleeding normal Canadians dry? Most Canadians can tolerate fair increases in rates but this all out assault on normal Canadians will destroy any semblance of growth! Is it the the overall goal of the BOC to cause a recession? One simple question for Mr. Macklem (and any other so called financial expert) is how does tripling interest rates for Canadians (particular ones that hold variable mortgages) in just one year help THEM reduce inflation? It is unfortunate that Macklem and his ilk have no concept of what financial pain feels like.