By Steve Scherer and David Ljunggren
OTTAWA (Reuters) -Bank of Canada Governor Tiff Macklem on Thursday said interest rates may not be high enough to bring inflation back down to target, sending a hawkish message after holding borrowing costs at a 22-year high a day earlier.
The Bank of Canada (BoC) on Wednesday kept its key rate at 5%, noting the economy had entered a period of weaker growth, but said it could hike again should price pressures persist. Inflation has remained above the bank’s 2% target for 27 months.
Macklem, in a speech to the chamber of commerce in Calgary, Alberta, said one possible reason for inflation staying above target was it might be taking longer for rates to work, but the other possibility “is that monetary policy is not yet restrictive enough to restore price stability.”
He added: “And unfortunately, the longer we wait, the harder it’s likely to be to reduce inflation.”
The central bank hiked rates by a quarter point in both June and July in a bid to tame stubbornly high inflation. However Macklem said that now “there is little downward momentum to underlying inflation.”
Canada’s gross domestic product unexpectedly shrank an annualized 0.2% in the second quarter, a sign the economy could have already entered a recession as higher rates sink in. But inflation accelerated in July to 3.3% and core measures remained at about 3.5%.
“I don’t think we’re in a recession,” Macklem told reporters after his speech. “We’re expecting low positive growth.”
The governor also said monetary policy had been working and the inflation target is now “in sight”.
“Maybe we don’t need to do more, but maybe we do,” he said.
The Canadian dollar was trading 0.3% lower at 1.3678 to the greenback, or 73.11 U.S. cents, after touching its weakest point in five months at 1.3694.
“Officials will remain highly vigilant and attuned to any changes in the direction of the economy and inflation,” said Royce Mendes, head of macro strategy at Desjardins Group.
The tone of Macklem’s speech clashed with the message coming from Canadian politicians in recent days. Before the Wednesday rate decision, three provincial premiers wrote to Macklem urging him to hold rates.
Finance Minister Chrystia Freeland, after the announcement on Wednesday, made a rare public comment on monetary policy, calling it “a welcome relief for Canadians.”
When asked whether the minister’s comments were appropriate, Macklem did not answer directly.
Freeland has made “very clear that she fully respects the independence of the Bank of Canada,” he said.
While Macklem did note the economy had been slowing since overheating in the first half of 2022, and that slower growth helped ease price pressures, he stressed the importance of getting inflation all the way down to the 2% target.
“Going forward, we will be looking for further evidence that price pressures are easing,” Macklem said.
Money markets see a 14% chance for a rate hike when the bank next meets in late October.
(Reporting by Steve Scherer and David Ljunggren; Additional reporting by Fergal Smith in Toronto; Editing by Mark Porter and Diane Craft)
