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BoC Governor Tiff Macklem Speech: Rate-Hike Rationale, Impact on Consumers

Economy Mar 03, 2022 12:11
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By Ketki Saxena

Investing.com -- After raising rates 25 basis points, from 0.25% to 0.50% yesterday, BoC governor Tiff Macklem addressed the rationale for, and likely impact of the decision in a speech today. 

The most immediately felt impact to consumers will be the rising costs of debt, “with higher rates on many mortgage and prime lending rates, but also rates for savings products”, Macklem noted. He also acknowledges that “For households and businesses that are already feeling the pinch of inflation, the higher cost of borrowing can be doubly painful”. 

Despite the difficulties for borrowers - which will no doubt be most acutely felt by overleveraged buyers of Canadian housing - Macklem acknowledges that the rate hike was necessary at this time in order to cool inflation. His rationale for hiking rates - a decision considered long overdue by economists - is, in short, that the “Slack in the economy is absorbed, there is solid momentum, and inflation is too high.”

Inflation is at 5.1%, a 30 year high, whilst the Canadian economy is firing on all cylinders, growing 6.7% in the last quarter, despite the Omicron wave. 

Interestingly, Macklem notes the rate hikes are expected to cool inflation that is “driven by domestic demand”  i.e. the factors not affected by externalities such as the supply chain crisis. 

Largely, however, Macklem does seem to blame inflation on external factors, such as: 

  1. Global shift toward consuming goods and not buying services during the pandemic

  2. Broad price increases to everyday items, which the bank blames partially on supply disruptions 

  3. The imbalance between demand and supply in the Canadian economy

Also interesting is that Macklem does not point to BoC monetary policy as a contributing factor to inflation, or having overstimulated the excessive demand that he does blame.

In today’s speech, Macklem also noted that the Russia-Ukraine conflict could cause further disruptions to global supply chains and further impact the rise in prices. While the bank expects inflation to decline in the latter half of 2022 as the pandemic eases, it does note that the pace of decline could be impacted by the Russian invasion of Ukraine. 

BoC Governor Tiff Macklem Speech: Rate-Hike Rationale, Impact on Consumers
 

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Comments (1)
George Thorm
George Thorm Mar 03, 2022 13:16
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They all seem fixated that inflation will drop, it may a little but wage inflation will be the gremlin in their assumptions, wages don’t go down, they all should know this, really !
 
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