Bank of Canada Governor Tiff Macklem on Wednesday said the focus was on whether rates needed to be raised and was not considering a rate cut, prompting traders betting that the central bank would cut rates as early as October. I objected.
Macklem made his remarks in an interview with Reuters after announcing the rate hike earlier and saying the central bank would pause to see how the economy would react to the tightening.
The announced moratorium intensified bets on a rate cut. Before the rate decision, money markets were pricing in about 40 basis points of easing in the second half of the year. They are currently looking at a cut of about 50 basis points.
“At some point, as things start to return to normal, we will probably look at a gradual reduction in interest rates,” Mr. Mackrem said.
“But inflation is still above 6%. We are not talking about cuts. Did you do it at the time?” We’re pausing to assess whether we’ve done enough,” Macklem said.
Banks raised interest rates at a record pace of 425 basis points in 10 months, keeping inflation low. That’s still more than three times the central bank’s target of 2%.
Rapidly rising interest rates have cooled the economy, but there is a risk that a tight labor market could trigger a spike in wage growth and a resurgence of inflation. The central bank has repeatedly said it wants rate hikes enough to slow the overheated economy, but not enough to plunge it into a deep recession.
“The hurdles for another rate hike are higher than last time,” said Mr. Mackrem.
The biggest short-term risk is that a rapid restart of China’s economy could push up global commodity and oil prices, which could push up global inflation, Macklem said.
Another key factor for banks is whether price inflation for services (less affected by rising interest rates) will remain stubbornly high as we move into 2023, making it harder to cut overall interest rates.
If service prices remain strong, “inflation will not come down as we expected, in which case we will probably need to do more,” Mr Mackrem said at the bank’s Ottawa headquarters. rice field.
But Macklem made it clear that the central bank will spend as much time as it needs to assess the effectiveness of cumulative rate hikes and carefully consider next steps.
The bank said inflation would fall to 3% by the end of the year and 2% by the end of next year, but made clear there were upside risks to its outlook.