The Bank of Canada is setting the stage for another 0.5% increase in the key rate in June, after a similar hike in mid-April.
“I suspect we will be looking at another 50 basis point hike. I’m not ruling out any option, but an increase of more than 50 basis points would be very unusual,” central bank governor Tiff Macklem told the parliamentary committee on Monday.
The central bank team is due to discuss the path of the key rate in the coming weeks ahead of the institution’s next announcement on June 1. A further rise will have the effect of boosting interest rates on mortgages and other loans to individuals and businesses, in an effort to rein in consumption.
On April 13, the Bank of Canada already raised the key rate by half a percentage point, from 0.5% to 1%. Such a sudden rise had never been seen since May 2000. Governor Macklem then warned that the key rate should climb to 2 or 3%, or even a little beyond, without saying how quickly the rise would occur.
Persistent inflation
The objective is to bring inflation under control, around the 2% target. At 6.7% annual increase, the rise in the cost of living gives cold sweats to consumers, but also to Mr. Macklem whose credibility has been undermined in recent weeks.
Several economists, including Jean-François Perreault of Scotiabank, and Senator Clément Gignac, former president of the Association of Quebec Economists, believe that the Bank of Canada misdiagnosed inflation and, in fact, took too long to raise the key rate, thus stimulating an economy that would have needed a brake a long time ago.
M.Macklem admitted to parliamentarians that he was mistaken about the “transitory” nature of inflation. He explained that he was surprised by the persistence of problems in global supply chains, but especially by the war in Ukraine which is deeply shaking up global markets.
“We were right on a lot of things, we were wrong on others. We react,” he said.
“I don’t know when the war will end. For the good of all, I hope it will end very soon,” he added.