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Bank of Canada not ruling out another oversized hike to fight inflation

Bank of Canada not ruling out another oversized hike to fight inflation
© Reuters. A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie

By David Ljunggren and Julie Gordon

OTTAWA (Reuters) -The Bank of Canada has not ruled out another oversized interest rate hike to fight sky-high inflation, governor Tiff Macklem said on Tuesday, acknowledging Canadians feel “ripped off” by fast rising prices.

Macklem, answering questions in the Senate’s banking, trade and economy committee, said that while the central bank is starting to see signs rate increases are slowing the economy, it is still in excess demand.

“Looking forward, we have indicated that we think interest rates need to go up and maybe that’s another bigger-than-normal step, or maybe we can go down to more normal steps,” Macklem said. “But we still think we have more to go.”

The Bank of Canada surprised markets with a smaller-than-expected 50-basis point increase last week, lifting the policy rate to 3.75%. It also forecast the economy would stall over the next three quarters.

Inflation, meanwhile, has eased to 6.9% from a peak of 8.1%, but it is still far above the central bank’s 2% target and underlying price pressures remain broad-based.

“Our mandate is price stability, we’re a long way from that mandate,” said Macklem.

“It’s been a long time since we had high inflation and we’re rediscovering that it corrodes the social fabric,” he added. “It makes people angry. People feel ripped off. And that’s one of the big problems with inflation and it’s an important reason why we got to get it back down.”

Earlier he reiterated the Bank of Canada would need still higher rates to fight stubborn inflation.

“How much further (rates rise) will depend on how monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding to this tightening cycle,” Macklem said.

“The effects of higher rates will take time to spread through the economy. … There are no easy outs to restoring price stability.”

Source: Investing.com

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