The head of the Bank of Canada made it clear that the mission to bring soaring inflation to a halt is incomplete. After the central bank moved on a smaller-than- expected 50-basis-point interest rate increase, the governor declared that it is not yet the time to pivot from an emphasis on slowing growth.
Macklem said that the tightening phase would come to an end. We are not there yet, but we are close. We are expecting interest rates to go up further and we will determine the pace based on developments going forward.
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The Bank of Canada will be influenced by headline inflation readings that have averaged 6.9 per cent over the last year. According to the monetary policy report, higher interest rates are necessary to slow the pace of price increases, as the outlook suggests inflation will still be above the central bank's target at the end of next year.
Macklem didn't say when the rate increases would end at the press conference.
Since March, the policy rate has been increased by three and a half percentage points.
Restoring price stability is not easy.
The Bank of Canada has a governor.
Most economists had pegged a 75-basis-point hike for the October policy decision. The terminal rate, or the end point of interest-rate increases, is a range of four per cent to 4.25 per cent, according to most economists.
It would be easy to push rates within that range.
In a note to clients, Veronica Clark, an economist at Citigroup Global Markets Inc., said that she expects another 50-basis point hike in December with a pause in January at 4.5%.
Clark wasn't the only one who stuck with her call.
There is a sign for a bank.
The photo was taken byJustin Tang.
Even though the bank stated that its preferred measures of inflation are not yet showing meaningful evidence of easing, it still suggested that interest rates would need to rise further. This may just be a slightly slower path to the same peak interest rate that we had forecast prior to today's hike.
Josh Nye, senior economist on the Royal Bank of Canada's economics team, held a similar view as he expected the rate to move higher still towards a peak of 4%, even as he called the October decision a "dovish pivot."
The range was extended by the investment banking arm of Royal Bank. Simon Deeley told his clients that he wanted an end point of 4%.
How do they stop raising rates when inflation is not close to their target?
The Bank of Nova Scotia has a chief economist.
With a constant stream of rate hikes ranging from 50 basis points to a full percentage point this year, it's easy to forget that a half per cent hike is still a hawkish move in a historical sense. The market expects Canada to see a 25-basis-point hike in December, though they haven't ruled out a 50-basis-point hike.
If the plan was to go bigger than a quarter-point hike, the central bank would have a difficult time. According to the monetary policy report, the GDP increased 1.5 per cent in the third quarter, falling from a previous estimate of two per cent. The path of growth will slow to an annual rate of half a percent in the last quarter of the year.
Canada's high household indebtedness is one of the reasons why the central bank needs to pivot on the path of rate hikes before the Fed.
The interest-rate sensitivity of the Canadian economy made it necessary for the Canadian central bank to pivot before the U.S. central bank. The statement leaves open the possibility of another 50-basis-point move in December, but economic under performance will likely limit the next hike to only 25 basis points.
One of the biggest challenges facing the central bank will be managing inflation expectations among Canadians.
Perrault told Financial Post's Larysa Harapyn that people don't think inflation is going to come down quickly. How is it possible for the central bank to not raise rates when inflation is high? Canadians will have to say that the bank has done enough.
The bigger challenge they have is that. How do they stop raising rates when inflation is not close to their target?
The email address is shughes@postmedia.
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