Bank of Canada ‘still prepared to be forceful’ on interest rates if needed: official

A day after the Bank of Canada signalled it would be open to a pause on interest rate hikes in 2023, an official with the central bank said it was “still prepared to be forceful” with its policy rate should the economy fail to slow as needed to beat inflation.

The Bank of Canada raised its benchmark interest rate by half a percentage point on Wednesday, bringing the policy rate up to 4.25 per cent.

The central bank also delivered a shift in tone alongside the rate hike, saying in a statement that it would “consider whether the policy rate needs to rise further” rather than the more direct language used in previous announcements earlier this year, when the Bank had said outright that rates would need to go higher to effectively tamp down inflation.

Bank of Canada Deputy Governor Sharon Kozicki gave more insight into the central bank’s path forward in a speech to the Institut de Développement Urbain du Québec on Thursday afternoon.

Kozicki re-emphasized that the Bank is open to a pause with its next rate hike in January, but she said the decision on how high rates will have to go in 2023 will be informed by upcoming data on inflation, the slowing of the Canadian economy, and relief in global supply concerns.

Speaking to reporters after her speech, Kozicki was asked whether oversized steps greater than the typical 25 basis points were still on the table and she did not rule out the possibility.

“If there were to be a very large shock, we would be prepared to act forcefully to rein things in,” she said.

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Kozicki said the inflation and interest rate environment at the end of the year is much different from when the central bank started its rate hike cycle in March.

Back then, interest rates were at a historic low of 0.25 per cent and inflation was climbing. Kozicki said, “it was pretty clear what direction rates needed to go” at that time it was only a question of how much they needed to rise.

With headline inflation having peaked in the summer and some parts of the economy showing signs of easing, she said the Bank of Canada is facing a new environment that opens the door to question whether rates need to rise further.

Inflation, which clocked in at 6.9 per cent in October, “remains too high” at more than three times the bank’s two per cent target, Kozicki said in her speech.

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But three-month rates of core inflation have declined to about 3.5 per cent, Kozicki said, an indication “that momentum in inflation is easing.”

While third-quarter economic growth remained strong, softening demand in interest-rate sensitive areas like housing activity are signs that tighter monetary policy is “working to rebalance supply and demand,” she said.

The Bank of Canada’s next interest rate decision will come on Jan. 25.

— with files from Reuters

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