For the second time this month, Bank of Canada Governor Tiff Macklem said that interest rates need to rise further.

He made the comment on Wednesday while speaking before the finance committee in Ottawa.

In the face of still-high inflation and an economy that continues to be in excess demand, Macklem said the Bank of Canada is trying to balance the risks of under- and over-tightening.

“If we don’t do enough, Canadians will continue to endure the hardship of high inflation. And they will come to expect persistently high inflation, which will require much higher interest rates and, potentially, a severe recession to control inflation,” he said, repeating comments he made earlier in the month.

“If we do too much, we could slow the economy more than needed. And we know that has harmful consequences for people’s ability to service their debts, for their jobs and for their businesses.”

Macklem acknowledged that the impact of higher rates is starting to weigh on growth, particularly the parts that are most sensitive to interest rates, such as housing and spending on big-ticket items.

“But, the effects of higher rates will take time to spread through the economy,” he added. The Bank’s current forecast is for economic growth to stall to “close to zero” over the next few quarters.

The Bank has so far raised its overnight target rate by 350 basis points this year, taking it from a low of 0.25% to 3.75% today.

But it needs to rise further yet, Macklem says. Just how much will depend on the impact monetary policy has on demand, how supply challenges unfold and how inflation and inflation expectations respond to the current tightening cycle, he said.

“We are getting closer, but we are not there yet,” he said.

Current rate hike forecast for December

Looking ahead to the Bank of Canada’s next rate decision on December 7, bond markets are currently pricing in an 88% chance of a quarter-point rate hike, while many bank economists continue to expect a 50-bps increase. That would bring the Bank’s overnight target rate to 4.25%, a level last seen in 2008.

While September inflation came in a touch lower than market expectations, observers say a key piece of data to firm up their forecasts will be the November jobs report, which will be released next week.

The October inflation data “underscores the need for the Bank of Canada to keep the pressure on interest rates to help bring down inflation,” wrote TD economist Leslie Preston. “October’s CPI report is one of two key remaining data releases before the Bank of Canada’s next rate decision in three weeks, and it certainly ticks the box for another 50 basis point increase.”

Economists at Desjardins, meanwhile, suggest the latest data is a sign of “some light appearing at the end of this long tunnel.”

Underlying inflationary pressures are softening according to a broad suite of indicators. While the road towards price stability is still a long one, every bit of positive development
matters,” they wrote. “This has us sticking to our call for the Bank of Canada to
hike rates only once more, with a 25bps move in December.”

---

Featured image by David Kawai/Bloomberg via Getty Images