Bank of Canada Governor Tiff Macklem says that the central bank is "getting closer" to raising interest rates as inflation continues to rise across the country.
While substantial monetary stimulus is still needed for the economy to fully recover from the pandemic, Macklem said the Bank of Canada remains focused on its inflation target of 2% at a time when risks associated with price pressures have increased.
In an opinion piece published in The Financial Times newspaper, Macklem wrote: "For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed. We are not there yet, but we are getting closer."
The language in the newspaper article is consistent with recent efforts by the Bank of Canada to reassure Canadians that it is serious about inflation, including a decision last month in which officials pushed up the timeline for possible interest rate increases to early next year.
That policy decision was more hawkish than expected and caught some market players by surprise, but Macklem said the move was in line with the central bank’s communications throughout the pandemic.
Canada’s inflation data for October will be released tomorrow (November 17). After the U.S. posted a hotter-than-expected 6.2% annual reading, economists have revised up their Canada estimate to 4.7%. Anything above that reading is likely to reinforce the view that inflationary pressures are becoming persistent.
Macklem reiterated that the Bank of Canada’s view is still that recent inflationary pressures will ease. Yet, he acknowledged that high level of uncertainty remains.
"Supply disruptions appear to be lasting longer than we thought, and energy price increases are adding to current inflation rates," he wrote.
He said the Bank of Canada will adjust policy if needed, depending on inflationary pressures.
"While our analysis continues to indicate that these pressures will ease, we have taken them into account for the dynamics of supply and demand," Macklem wrote. "What our resolve does mean is that if we end up being wrong about the persistence of inflationary pressures and how much slack remains in the economy, we will adjust."
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