Macklem hints at a second half-point rate hike, while dousing talk he could go bigger

Article content

Bank of Canada governor Tiff Macklem telegraphed a second half-point increase at the central bank’s next interest-rate announcement, while dousing speculation he might be considering an even bigger move.

Article content

“Anything bigger than a 50-point increase would be very unusual,” Macklem said during testimony at the House finance committee on April 25.

Macklem excited some market participants late last week by refusing to rule out increases greater than half a percentage point during a video call with reporters on April 21.

Central bankers rarely rule out anything, as they prefer to cloak their future intentions in ambiguity. Still, several news organizations amplified the comments, as Statistics Canada had reported a day earlier that inflation rose much faster than expected in March, suggesting the Bank of Canada would need to play catch-up. The headlines caught the attention of Bay Street, where investors and observers have grown increasingly alarmed by inflation.

Article content

“On the sidelines of the IMF meetings, (Bank of Canada) governor Tiff Macklem seems to suggest a 75 (basis point) rate hike is coming,” tweeted Royce Mendes, an economist at Desjardins Group, the big Montreal-based co-operative. “That’s sensible given the latest readings on inflation and unemployment. It would actually be reckless to continue stimulating the economy at this point.”

There is no disagreement that central banks are chasing inflation; the debate is over how fast they need to run to catch up.

(The Canadian economy) can handle higher interest rates. It needs higher interest rates

Tiff Macklem

Macklem acknowledged the central bank’s assumption at the start of 2021 that inflationary pressures would recede relatively quickly was a mistake. Canada’s consumer price index surged to 6.7 per cent in March from a year earlier, as the jobless rate dropped to a record low. The Bank of Canada’s new economic forecast sees headline inflation at 4.7 per cent at the end of the year, well outside the central bank’s comfort zone of one per cent to three per cent.

Article content

“It’s fair to say that Team Transitory has disbanded,” Macklem said during testimony at the House finance committee, referring to the heated debate that arose alongside last year’s burst of inflation.

Macklem, his American counterpart, Federal Reserve chair Jerome Powell, and others bet that sharp price increases a year ago would fade as supply disruptions eased. However, that never happened, and demand only continued to strengthen, as economies recovered far faster from the COVID-19 recession than many thought possible. The result is the biggest inflation scare since the early 1980s.

“The Canadian economy is in good shape,” Macklem said. “It can handle higher interest rates. It needs higher interest rates.”

Article content

The Bank of Canada raised its benchmark interest rate a half-point on April 13, an aggressive move since policy-makers prefer iterative quarter-point adjustments.

Macklem told the committee that he and his deputies “will be considering” a second half-point increase when they next adjust the policy rate on June 1. The governor suggested that’s as aggressive as the central bank intends to get — at least for now.

“I expect we’ll be considering another 50-point increase,” Macklem said. At the same, with a war in Europe, and as another wave of COVID-19 disrupts life in China, the central bank doesn’t want to “overcool” the economy, the governor said. “You want to do this in a series of steps,” he said.

• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin