Bank of Canada is ready for more interest rate hikes

According to the Governor Tiff Macklem, the Bank of Canada plans to follow its interest rate increase strategy, as concerns over elevated price pressures and inflation expectations are intensifying.

On Thursday, he pointed to the national economy still “clearly” showing excess demand: businesses are dealing with an extremely tight labor market, wage gains are increasing and underlying inflation pressures are not weakening.

Such comments changed the discussion on whether the BoC can move in a different direction than the US Federal Reserve. Before today’s speech, financial markets were betting the central bank would stop at 4%, which is 0.5% lower than where the U.S. is moving.

Now, they are pricing in 50-50 odds that Canada’s terminal rate will reach 4.25%.

Macklem says although a recent annual inflation slowdown is “welcome news”, the inflation will “not go down just by itself.”

“In other words, there’s more work to do,” – Macklem noted. “The obvious implication is that more rate hikes are warranted.”

Making it clear that we’re not at the end of the increase cycle yet, Macklem said: “Additional information will be necessary for us to start thinking about switching to a more balanced approach.”

The BoC has already raised the borrowing costs by 3% since March.