By Ketki Saxena
Investing.com -- In a speech today to the Calgary Chamber of Commerce, Bank of Canada Governor Tiff Macklem doubled down on the need to raise interest rates even as macroeconomic inflationary pressures ease, including commodity prices, shipping costs, and supply chain bottlenecks.
He also pointed to these “global forces” as factors that can “Explain why inflation has eased slightly since its peak in June”. The annual rate of Consumer Price Index growth fell to 7% in August, down from 7.6% in July and 8.1% in June. But he downplayed the impact the recent slowdown will have on central bank policy.
However, while noting that the signs of easing inflationary pressures globally are “encouraging”, Macklem reiterated that “ We can’t count on easing pressure on global prices to lower inflation in Canada”.
Wage-Price Spiral a Growing Concern in Canada
Despite the cooling CPI, Mr. Macklem noted that “Domestic inflationary pressures have yet to ease. That doesn’t mean higher interest rates are not working, but it will take time”. He also noted that these “Domestic sources of inflation are becoming more important. In addition to higher prices in goods, we’re now also seeing higher demand for services driving up their prices as well.”
The Bank of Canada Governor also pointed to a tight labour market, which puts upward pressure on wages and business costs, stoking concerns of a wage-price spiral. Macklem noted “Businesses are reporting widespread labour shortages. At the same time, wage growth has risen and continues to broaden.”
Mr. Macklem also highlighted the importance of inflation expectations metrics, noting that as companies and workers expect permanently higher inflation, they may set higher prices and demand higher wages.
Entrenched Inflation to Be Avoided at All Costs
Taming inflation before it becomes entrenched, and tamping down expectations of permanently high inflation leading to a wage-price spiral, are now the Bank of Canada’s priorities.
The Bank of Canada Governor mentioned concerns about entrenched inflation multiple times in his speech, noting that “The longer high inflation persists and the more pervasive it becomes, the greater the risk that high inflation becomes entrenched”.
Mr. Macklem reiterated once again the need to tackle inflation with high-interest rates now to avoid more pain in the future, despite the “setbacks along the way” (presumably a recession being counted as one of the setbacks).
“When inflation expectations become entrenched, we need even higher interest rates to restore price stability, which leads to a weaker economy”, Mr. Macklem said. “The clear implication is that further interest rate increases are warranted.”
What today’s speech means for further Bank of Canada Rate hikes
After Mr. Macklem’s speech, traders firmed up their bets on a 50-basis-point rate hike at the BoC’s next policy decision on Oct. 26.
Prior to the speech, money markets were betting the Bank of Canada would reach a terminal rate of 4%. Markets are now pricing in 50-50 odds that Canada’s terminal rate will hit 4.25%
The Bank of Canada has raised interest rates five times since March, moving the benchmark policy rate from 0.25% to 3.25%.