BoC’s Macklem: More interest rate hikes are “warranted”

Having already raised interest rates by 300 basis points this year, the Bank of Canada’s Tiff Macklem confirmed on Thursday that additional rate hikes (plural form) are “warranted.”

In a prepared speech delivered at the Halifax Chamber of Commerce, Macklem said the Bank has yet to see clear evidence that underlying—or “core”—inflation is coming down.

“When combined with still-elevated near-term inflation expectations, the clear implication is that further interest rate increases are warranted,” he said. “Simply put, there is more to be done.”

Additionally, he said labour conditions remain “very tight,” wage growth is rising, and the economy remains in excess demand. “We will need additional information before we consider moving to a more finely balanced decision-by-decision approach,” he said.

Observers took the comments as hawkish and a signal that the Bank isn’t likely to pivot to a more dovish stance at its upcoming rate meeting on October 26 as some had expected.

“There had been a narrative offered in the market that October’s hike would be one more and done with a coming dovish pivot,” wrote Scotiabank economist Derek Holt. “That narrative got flushed today.”

“With less than three weeks to go before the next decision on October 26…the Governor is clearly not thinking that the October communications will involve a dovish pivot versus a largely preset path to keep hiking thereafter,” he added.

A terminal rate of at least 4% is growing more likely

With the benchmark lending rate currently at 3.25%, there are growing expectations that the Bank of Canada’s terminal rate for this tightening cycle will be 4%, if not higher.

“If the BoC hikes 50+ [bps] this month and is signalling the plural form of rate hikes still lies ahead, then markets are probably correct in pricing a terminal rate over 4%,” Holt wrote.

Bond markets are currently pricing in equal odds of a 25-bps or 50-bps rate hike later this month, but Macklem’s comments could start to tip the scale towards the latter.

“The hawkish nature of this speech affirms our expectations that another large move (i.e., greater than 25 bps) on October 26 looks to be in the offing,” noted economists from National Bank of Canada. “The tone here would presumably be consistent with continued tightening in December, where we see the policy rate at no less than 4%.”

Earlier this week, the Organisation for Economic Co-operation and Development (OECD) released its latest economic outlook, where it forecasts the Bank of Canada’s benchmark rate to reach 4.5% in 2023.

“Further policy rate increases are needed in most major advanced economies to ensure that forward-looking measures of real interest rates become positive and inflation pressures are reduced durably,” the report reads. “This is likely to involve a period of below-trend growth to help lower resource pressures.”

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