Bank of Canada says “considerable space” left to hike, 50 bps move possible

Bank of Canada Governor Tiff Macklem speaks during a news conference in Ottawa, Ontario, Canada December 15, 2021. REUTERS/Blair Gable

OTTAWA, March 3 (Reuters) – The Bank of Canada has “considerable space” left to raise interest rates this year, Governor Tiff Macklem said on Thursday, and did not rule out a rare 50-basis-point move if needed to rein in hot inflation.

“There is certainly considerable space to raise interest rates over the course of the year,” Macklem said in a question and answer session after a speech to a business audience.

“If we have to move more quickly, we are prepared to do that,” he added. “I am not going to rule out a 50-basis-point move in the future.”

The Bank of Canada last hiked by 50 basis points in May 2000. On Wednesday, the central raised its policy rate to 0.5% from a record low 0.25%, marking its first increase since October 2018. read more

Earlier, Macklem said the bank would act “with determination” to rein in soaring prices, saying a failure to act decisively would make it much more painful to bring inflation back to target.

He also said the central bank did not intend to actively sell bonds when it embarks on its first-ever quantitative tightening program, instead allowing holdings to roll off as they mature.

Inflation in Canada hit a 30-year high of 5.1% in January and price pressures are broadening, making buying necessities like gas and groceries more expensive. Despite this development, inflation expectations remain well-anchored, Macklem said.

“Canadians can expect us to use our tools with determination to keep them that way,” he told the CFA Society Toronto in a webcast. “The lesson from history is that if inflation expectations become unmoored, it becomes much more costly to get inflation back to target.”

The central bank made clear that the control of interest rates remained its primary monetary policy tool, to be complimented by quantitative tightening. It did not give a timeframe for starting QT, saying only that it “would be a natural next step” following Wednesday’s rate increase.

“When we initiate QT, we will stop purchasing Government of Canada bonds. From that point forward, maturing government bonds will not be replaced when they roll of the balance sheet,” he said. “We do not intend to actively sell bonds.”

In the current reinvestment phase, the Bank of Canada buys roughly C$1 billion worth of government bonds each week to keep the size of its balance sheet constant.

The Canadian dollar was trading 0.4% lower at 1.2675 to the greenback, or 78.90 U.S. cents.

Reporting by Julie Gordon and David Ljunggren in Ottawa, additional reporting by Fergal Smith in Toronto
Editing by Paul Simao and Jonathan Oatis

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