Bank of Canada says interest rates may not be high enough


By Steve Scherer and David Ljunggren

OTTAWA (Reuters) -Bank of Canada Governor Tiff Macklem on Thursday said interest rates may not be high enough to bring inflation back down to target, sending a hawkish message after holding borrowing costs at a 22-year high a day earlier.

The Bank of Canada (BoC) on Wednesday kept its key rate at 5%, noting that the economy had entered a period of weaker growth, but said it could hike again should price pressures persist. Inflation has remained above the bank’s 2% target for 27 months.

Macklem in a speech to the chamber of commerce in Calgary, Alberta, said one possible reason for inflation staying above target was that it might be taking longer for rates to work, but the other possibility “is that monetary policy is not yet restrictive enough to restore price stability.”

He added: “And unfortunately, the longer we wait, the harder it’s likely to be to reduce inflation.”

The central bank hiked rates by a quarter point in both June and July in a bid to tame stubbornly high inflation. However Macklem said that now “there is little downward momentum to underlying inflation.”

Canada’s gross domestic product unexpectedly shrank an annualized 0.2% in the second quarter, a sign the economy could have already entered a recession as higher rates sink in. But inflation accelerated in July to 3.3% and core measures remained at about 3.5%.

“We don’t want to raise our policy rate more than we have to,” Macklem said, adding that persistently high inflation would be worse for Canadians than high borrowing costs. “We need to stay the course.”

After Macklem’s comments, the Canadian dollar was trading 0.3% lower at 1.3678 to the greenback, or 73.11 U.S. cents, after touching its weakest in five months at 1.3694.

“Officials will remain highly vigilant and attuned to any changes in the direction of the economy and inflation,” said Royce Mendes, head of macro strategy at Desjardins Group. “In particular, the central bank will be watching a host of price measures,” including core measures, he said.

The tone of the speech clashed with the message coming from Canadian politicians in recent days. Before the Wednesday rate decision, three provincial premiers wrote to Macklem urging him to hold rates.

Finance Minister Chrystia Freeland after the announcement on Wednesday made a rare public comment on monetary policy, calling it “a welcome relief for Canadians.”

While Macklem did note that the economy had been slowing since overheating in the first half of 2022, and that slower growth helped ease price pressures, he stressed the importance of getting inflation all the way down to the 2% target.

“Going forward, we will be looking for further evidence that price pressures are easing,” Macklem said.

Money markets see a 14% chance for a rate hike when the bank next meets in late October.

A majority of economists polled by Reuters at the end of last month – 24 of 34 – expect the central bank to keep its policy rate at the current level or higher until at least the end of March 2024.

(Reporting by Steve Scherer and David Ljunggren; Editing by Mark Porter)

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