Bank of Canada’s credibility is questioned because of inflation

While the Bank of Canada Governor Tiff Macklem is worried by an overheating national economy and tries to battle the record high inflation, his credibility is put in question.

The central banker is facing critics from the opposition Conservative Party politicians, who are casting doubt on his commitment to the inflation goal. Although most economists and observers don’t consider the criticism serious, it’s still a hard time to be attacked.

Right now, the BoC is in the middle of its shocking campaign aimed at reducing inflation and hoping to strengthen public confidence that it’s serious about solving the issue. The more credible the Bank is considered, the more price expectations will remain under control. It means higher odds of a soft landing.

Macklem is expected to bring three 0.50% rate hikes during the three months. The first increase was in the middle of April, the second one could happen this week, and the third one is expected in the first half of July.

“In case Tiff worries about his credibility, he probably needs to overdo it (unfortunately) in terms of interest rate hikes and risk a little bit more,” – Chris Ragan from McGill University says.

The BoC’s key lending rate, which was at 0.25% at the beginning of 2022, is expected to reach 2% on July 13. All these hikes have to convince households and companies that the inflation sharp growth will not last, before they begin to raise their expectations for wages and prices.

It looks like markets are sure Macklem will reach his goal.

Following three large increases, the central bank will probably slow down and bring 3-4 more gains but by 0.25% each. Experts believe the Bank will stop at 3%.

It’s well short of what today is considered a high “contractionary” rate, meaning there are no visible reasons for causing a sharp slowdown to restrain the price pressures or repair the Bank’s credibility.