- When it comes to the central bank’s interest rate path and regulating Canada’s out-of-control inflation, Tiff Macklem said he wouldn’t “rule anything out.”
- Following the Bank of Canada’s interest rate hike last week, Canada’s major banks promptly upped their prime rates to 3.20 percent, a 50-basis-point increase.
On a day when the Federal Reserve startled markets with its strong talk on interest rates, Bank of Canada Governor Tiff Macklem said he wouldn’t “rule anything out” when it comes to the central bank’s interest rate path and controlling Canada’s out-of-control inflation.
Macklem spoke with reporters electronically from Washington, D.C., where he is attending meetings of the International Monetary Fund and World Bank Group, and G7 and G20 central bank governors and finance ministers.
He wouldn’t rule out raising rates by another 50 basis points all at once, after raising them by that much to 1% just last week, and said he’s “prepared to be as aggressive as necessary.”
After one Fed member stated a 75-basis-point boost couldn’t be ruled out because inflation had risen to 8.5 percent, Federal Reserve chairman Jerome Powell said a 50-basis-point rise is possible in May.
On Powell’s comments, the S& P 500 index fell 1.5 percent by the end of the North American trading day, while the Dow Jones industrial average fell just over 1%. Meanwhile, the NASDAQ, heavily weighted in the technology sector, plummeted by almost 2%.
The Bank of Canada, according to Craig Jerusalim, portfolio manager at CIBC Asset Management, is unlikely to raise rates above 50 basis points all at once.
“I think the 50 (basis-point) pace is probably further appropriate and measured,” he added, noting that they have already moved ahead of the U.S.
In an interview, Andrew Kelvin, a strategist at T.D. Securities, warned that if “there is little to no slack remaining in the economy,” the central bank might raise rates by more than 50 basis points.
“However, with longer-run inflation expectations firmly in place, I believe the Bank of Canada should continue to raise rates in 50-basis-point increments,” he said.
During the roundtable with reporters, Macklem also stated that due to supply chain interruptions’ pervasiveness, the Ukraine crisis, and the increase in COVID-19 cases in China, inflation would take longer to subside.
In March, Canada’s inflation rate jumped past estimates to 6.7 percent, a three-decade high.
In a recent paper, Derek Holt, head of capital markets economics at Scotiabank, predicted that when Statistics Canada adds secondhand vehicle prices to the Consumer Price Index in the upcoming month’s report, inflation might rise to over 8%.
“When they add used vehicles, it will be the final nail in the coffin of the long-held myth that Canada has been better at managing inflation than the United States and other countries due to a lower official inflation rate,” he added.
Increases in interest rates that are higher and faster could put even more pressure on homeowners with variable-rate mortgages who are still getting acclimated to the recent rise in prime rates. Following the Bank of Canada’s interest rate boost last week, Canada’s main banks quickly raised their prime rates by 50 basis points to 3.20 percent.
In an interview, Ratesdotca mortgage analyst Gary Bovair said, “Canada’s homeowners will be under great pressure to make the option to keep the course or face a considerably higher mortgage payment by locking in.”
“It will harm them in either case, especially those on the verge of qualifying in the last year or two.”
Macklem acknowledged that some homeowners are apprehensive but added that the Canadian economy “needs higher interest rates” and that the central bank will monitor the impact on all Canadians.
He stated, “We’re not on autopilot.”
Source: Global News