(Ottawa) Bank of Canada Governor Tiff Macklem says it’s possible to counter inflationary pressures at home by raising interest rates without triggering a recession.
Posted at 7:00 p.m.
Inflation hit a 30-year high in March at 6.7%. Some experts believe that the Bank of Canada may have to strike out a strong remedy to curb the rise in prices that is hitting all sectors – a remedy that could drag the Canadian economy into a recession.
Testifying Monday to elected officials for the first time since the Bank of Canada decreed a 50 basis point interest rate hike two weeks ago, Macklem said the Canadian economy is experiencing a period of strong growth. and could take other increases.
An increase of at least 50 basis points also seems acquired in June, he said during a two-hour testimony before the finance committee of the House of Commons.
Mr. Macklem pointed out that getting the inflation rate back to the 2-3% range, as mandated by the Bank of Canada, will not be an easy exercise. In normal times, the Bank of Canada favors a 0.25% increase in the key rate. But inflation must be brought under control at all costs and as quickly as possible, he argued.
“We have signaled to Canadians that they should expect further interest rate increases. We said we needed to normalize monetary policy fairly quickly. As we assess our next move, the usual step would be 25 basis points. But we are looking at an increase of 50 basis points. I wouldn’t rule out other possibilities, but anything over 50 basis points would be very unusual,” he explained.
Cautious optimism
Asked if the remedy he is now considering could cause the Canadian economy to cough, the governor was cautiously optimistic. He said the jobless rate hit a historic low of 5.3% last month and there are hundreds of thousands of vacancies. Furthermore, the current policy rate at 1% is still below the level before the COVID-19 pandemic.
“The economy needs higher interest rates and it can handle them. Demand is beginning to exceed our production capacity. We need higher rates to restore the balance of the economy and moderate inflation in the country. Higher interest rates are also needed to keep Canadians’ inflation expectations anchored on target. [de la Banque du Canada] said Governor Macklem.
“We believe the economy can grow and inflation can be controlled. I’m not saying it won’t be difficult. […] Are there any risks? Yes, of course there are risks. The only thing I would say is that we take the decisions one at a time and we will monitor how our interest rates affect the economy. We will also monitor their effects on inflation and we will calibrate our decisions according to what the economy needs,” he added.
During his testimony, Mr. Macklem acknowledged that the rate of inflation was significantly higher than the Bank of Canada had forecast at the start of the year. At that time, she still maintained that inflationary pressures were temporary.
But the Russian-induced war in Ukraine, rising oil prices and recent containment measures in China due to the COVID-19 pandemic have changed the game, causing further disruptions to supply chains.
“All of these factors mean that inflation is not only up, but up for a longer period of time,” agreed Tim Macklem, who wore a Ukrainian flag pin on his jacket. “Much of the inflation we have right now is coming from outside our borders. […] The war in Ukraine has driven up the price of energy and other commodities and is further disrupting global supply chains. The factors driving up inflation come from abroad, but given the excess demand in the economy, we also have to deal with internal price pressures. »