Macklem not ruling out future BoC rate hike to get to 2% inflation target

Governor of the Bank of Canada Tiff Macklem says the central bank is prepared to raise the policy rate even further as it attempts to bring inflation back to its 2 per cent target in 2024.

The Bank held its policy rate at 4.5 per cent on Wednesday, remaining confident inflation will continue to decline from 5.2 per cent in February to 3 per cent by the middle of this year. However, the Bank acknowledged getting inflation back to its 2 per cent target in 2024 will be more challenging.

“Getting inflation the rest of the way back to 2 per cent could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize,” reads the statement released on Wednesday.

The bank indicated it is prepared to raise the policy rate further if needed. 

“If monetary policy is not restrictive enough to get us all the way back to the 2 per cent target, we are prepared to raise the policy rate further to get there,” said Macklem during a press conference in Ottawa on Wednesday.

Persistent costs of services in the Canadian economy remain the driving factor in inflation, with a tight labour market and wage growth remaining around 4 to 5 per cent. Statistics Canada reported 205,000 net new jobs in the first three months of this year, exceeding expectations, and the unemployment rate remains at a historic low of 5 per cent.

Macklem said the central bank is using the pause in rates to assess whether it has done enough and considerations are underway on whether interest rates need to stay high for longer. 

Economic growth in the Canadian economy in the beginning of 2023 was slightly higher than initially projected, with GDP growth sitting at 2 per cent in the first quarter. Growth for the remainder of the year is expected to average less than 1 per cent, with the likelihood of negative growth still a possibility.

Asked about whether he is ruling out a recession this year, Macklem said the bank is not forecasting a major contraction or a large increase in unemployment.

Household spending in Canada continues to slow in 2023, caused mainly by elevated debt and the cost of servicing it. The central bank expects the share of income spent on interest payments will continue to rise this year, as households renew their mortgages.

“We have though for quite a while now, talked about high levels of household debt being a vulnerability and it is something we need to watch as the economy adjusts to higher interest rates,” said Bank of Canada Senior Deputy Governor Carolyn Rogers in Ottawa on Wednesday.

The Monetary Policy Report (MPR) released by the bank on Wednesday highlighted interest rates increased by $133 billion, a 45 per cent increase from last year.

Growth in 2024 is below what was projected, with the Canadian economy set to grow by 1.3 per cent, before rebounding back up to 2.5 per cent in 2025.

The global economy is projected to grow by 2.6 per cent this year and 2.1 per cent in 2024. Global GDP is revised down next year due to further tightening in monetary policy across advanced economies.

The central bank also highlighted the recent stress in the United States banking sector, which has caused tighter credit conditions that will weigh on global growth and U.S. demand for Canadian exports.

“Funding costs for U.S. banks have increased, and concerns exist that conditions could deteriorate further,” reads the MPR.

The next policy rate announcement is expected on June 7, 2023.