BoC prepared to raise rates if inflation remains stuck above 2 per cent: Macklem

Bank of Canada governor Tiff Macklem says the central bank is ready to step in if stress in the global banking system affects Canada, but emphasized it won’t back off from its inflation fight as it works to bring inflation down to its two per cent target.

According to prepared remarks Macklem is delivering at the Toronto Region Board of Trade today, the governor addresses the recent stress in the global banking system that was set off by the collapse of Silicon Valley Bank in the United States.

Here in Canada the spillover effects have been muted, reflecting the financial stability we are known for internationally,” he said. “But financial stability risks remain.”

Macklem concedes that financial instability raises the odds of a sharper economic downturn, but says achieving both financial stability and price stability is important and that the two are related.

The governor says the central bank has separate tools to address both mandates and that the Bank of Canada will take into consideration the interacting effects between financial stress and inflation.

If financial stress leads to tighter borrowing conditions that make loans more expensive and harder to get, he says the governing council would take this into consideration when setting the policy rate.

“In the current environment, monetary policy has already tightened financial conditions,” Macklem said. “But if financial stress were to lead to more tightening than expected and if this were to persist, we would need to take this into consideration as we set the policy rate to achieve our inflation target.”

But though inflation has fallen significantly from its peak of 8.1 per cent last summer, Macklem stresses that the Bank of Canada’s job is not done just yet and there is work to do before it can move below three per cent.

The Bank of Canada paused its aggressive rate hiking cycle earlier this year to monitor the effects of its previous rate hikes on price growth. So far, inflation has been falling fast enough to keep the Bank of Canada on the sidelines, but the central bank is keeping the door open to more rate hikes if needed.

“If we start to see signs that inflation is likely to get stuck materially above our two per cent target, we are prepared to raise rates further,” he said.

The Bank of Canada’s key interest rate is sitting at 4.5 per cent, the highest it’s been since 2007.