Bank of Canada is ready for more rate hikes in case inflation stays above 2%

According to Governor Tiff Macklem, the Bank of Canada is ready to act again if stress in the global banking system influences Canada. However, he says it will not stop its fight against inflation and it works to reduce inflation back to the target level of 2%.

Macklem addresses the latest stress in the global banking system caused by the collapse of Silicon Valley Bank in the U.S.

“In Canada the consequences of it have been quite muted, reflecting the financial stability we are known for in the world,” – he noted. “Nevertheless, financial stability risks still remain.”

Macklem admits that financial instability increases the odds of a more drastic economic downturn, but says it’s equally important to achieve both financial and price stability as they are interrelated.

The governor says the BoC has separate tools for both factors and it will take into consideration the correlation between financial stress and inflation.

In case the financial stress causes tighter borrowing conditions that raise the borrowing costs and makes it even more difficult to receive loans, the governing council will take this into consideration when determining the overnight rate, he added.

“With the current environment, monetary policy has already tightened financial conditions,” – Macklem noted. “However, if financial stress causes more tightening than expected, we would have to take this into consideration when we determine the key lending rate in order to reach our inflation target.”

While inflation has declined sharply compared to its summer peak of 8.1%, Macklem points out that the BoC’s task isn’t done yet and there’s still work to do before it can move below 3%.

As you know, the central bank paused its aggressive rate-increasing cycle earlier this year to assess the influence of its previous rate hikes on price growth. The inflation has been falling quickly enough for the Bank not to interfere so far, but it still leaves the possibility of another increase in case it’s necessary.

“If we begin to see that inflation is likely getting stuck above our target level of 2%, we are ready for more rate hikes,” – he explained.

Today, the Bank’s overnight rate is 4.5% – it’s the highest level since 2007.

The next rate meeting is scheduled for June 7.