Tiff Macklem says more rate hikes are coming despite cooler inflation

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Written by
Penelope Graham

Soaring inflation has been front and center this year for economists and consumers – and the country’s central bank has had the unenviable task of controlling it with tighter monetary policy.

However, while it looks like this tougher interest rate environment is having its intended effect – July’s inflation reading came in at 7.6%, indicating the measure may have reached a peak – this will not deter the Bank of Canada (BoC) from continuing to hike rates. cycle.

In an opinion piece written for the national postBoC Governor Tiff Macklem said that while inflation is showing signs of slowing, “it remains far too high,” and it likely will be “for some time.”

“Many of the global factors that have driven inflation up will not go away quickly enough – supply chain disruptions continue, geopolitical tensions are high and commodity prices remain volatile. And here at home, our economy is running too hot,” writes Macklem.

“As Canadians finally benefit from a fully reopened economy, they want to buy more goods and services than our economy can produce. Businesses are struggling to keep up with demand, leading to delays and higher prices. The result is widespread inflation. Even though inflation eased a little in July, the prices of more than half of the goods and services that make up the CPI basket are rising faster than 5%.

He also dispelled any notion that the BoC would ease off in terms of rate hikes in the near future, despite the softer reading.

“Tuesday’s inflation figure offers some relief, but unfortunately it will take some time before inflation returns to normal. We know our job isn’t done yet — it won’t be until inflation returns to the 2% target,” he wrote.

The Bank of Canada has raised its key overnight lending rate four times since March, most recently implementing a surprise percentage increase in July. Collectively, the hikes have brought the core cost of borrowing in Canada down from a pandemic-induced emergency low of 0.25% to 2.5% today. This led to soaring mortgage rates and a considerable slowdown in housing markets across the country. The Bank is widely expected to continue raising rates to between 3.25 and 3.5% before the end of its hike cycle.

READ: Housing affordability in Canada hits worst level in 30 years

Macklem says a subdued housing market is a key part of the bank’s inflation strategy.

“With higher mortgage costs, real estate activity has rapidly slowed after unsustainable growth during the pandemic, and house prices are moderating. As housing slows, people’s spending on housing-related goods and services, such as renovations, appliances, and furniture, is also expected to slow,” he writes.

READ: Canadian home prices drop 5% in July, down 23% overall from market peak

Macklem’s assurance of future rate hikes is unlikely to surprise economists, who pointed to troubling trends in July inflation data, despite a lower overall reading.

In a “Economic flash”, Karyne Charbonneau, executive director of the economy at CIBC Capital Markets, points out that the cost of several elements of the basket of goods has increased, in particular food, hotels, restaurants and air transport.

“With the current large CPI revisions in recent months clouding the message of preferred core measures, the Bank of Canada is likely to be watching non-food/energy inflation closely these days,” she wrote. “Today’s acceleration in this category is therefore not good news for the Bank, which should still be on track for a 75 [basis point] rate increase at its next meeting.

Scotiabank’s Derek Holt agrees that a three-quarters hike is still likely in the cards for the Bank’s September 7 announcement, given the pick-up in core inflation.

“The Bank of Canada won’t care if the headlines soften,” writes the lender’s vice president and chief financial markets economics officer.

“They will be more concerned about the continued upward pressure on core metrics. The data lends itself to a 75 [basis point] on September 7, which would bring the policy rate closer to very slightly restrictive territory given estimates of the neutral policy rate range of 2-3%.

Written by
Penelope Graham

Penelope Graham is the editor of STOREYS. She has over a decade of experience in real estate, mortgages and personal finance. His commentary on the housing market is featured frequently in national and local media, including BNN Bloomberg, CBC, The Toronto Star, National Post and The Globe and Mail.

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