In year-end remarks, Bank of Canada Governor Tiff Macklem said that his top concern is the central bank fails to raise interest rates high enough and inflation becomes entrenched across the country.
Macklem acknowledged that raising interest rates too much could drive the economy into a recession but added that the “greater risk” is failing to permanently lower consumer prices.
“We are trying to balance the risks of over-and under-tightening monetary policy,” Macklem said in a speech delivered in Vancouver. “If high inflation sticks, much higher interest rates will be required to restore price stability, and the economy will have to slow even more sharply.”
The comments show that the Bank of Canada would rather go too far in raising interest rates than to fall short and let inflation become entrenched.
Last week, the Bank of Canada issued its seventh consecutive rate hike, taking its trendsetting overnight interest rate to 4.25%, its highest level in more than a decade.
While many economists now expect Canada’s central bank to pause its rate increases and assess their impact on the economy, Macklem said that any future decisions on interest rates will be based on economic data.
Macklem also reiterated that the central bank remains committed to its 2% inflation target. Inflation in Canada is currently at 6.9%, more than three times higher than the Bank of Canada’s target.
“Our resolve is absolute. We will restore price stability for all Canadians,” Macklem said.
Before Macklem’s year-end speech, markets had priced in a 25-basis point interest rate increase at the Bank of Canada’s next meeting on January 25, 2023.
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