Bank of Canada Downplays Fear of Diverging Rate Path From Peers

A Bank of Canada official reiterated policymaker’s focus on the 2% inflation target, and said that the central bank can diverge from its peers in normalizing interest rates.

(Bloomberg) — A Bank of Canada official reiterated policymaker’s focus on the 2% inflation target, and said that the central bank can diverge from its peers in normalizing interest rates.

In a speech from the Alberta School of Business in Edmonton, Deputy Governor Paul Beaudry spoke about the importance of getting inflation “all the way” back to target, even if the Bank of Canada’s policy route differs from its peers.

“The bottom line is that we shouldn’t be too concerned if Canada follows a slightly different path to normalization than our counterparts,” Beaudry said in prepared remarks of the speech on Thursday, adding that “what matters most is getting all the way there.”

While reinforcing the central bank’s commitment to getting inflation back to 2%, the deputy governor’s comments also suggest the Bank of Canada may be less worried about holding the benchmark overnight rate at 4.5% while its peers continue hiking borrowing costs.

Beaudry laid out two possible outcomes for exchange rates if Canada manages to return inflation to target before the US, its main trading partner, and other nations. 

If the Canadian dollar doesn’t appreciate against other currencies, exports get a boost, company profits grow and firms hire more workers to meet demand, he said. If the loonie strengthens, consumers and businesses have more purchasing power for foreign goods.

“Neither outcome is bad,” Beaudry said.

Governor Tiff Macklem hiked rates by a quarter percentage point and declared a conditional pause last month, saying that the bank would move to the sidelines and assess the impact of its rapid tightening on the economy.

Canada’s pause came ahead of the US Federal Reserve and major central banks in advanced economies, in part because the northern nation’s economy is expected to be more sensitive to higher borrowing costs, slowing faster due to high household debt levels and exposure to the housing sector. 

Macklem and his officials have raised rates by 425 basis points in 11 months. Economists expect the bank to hold at 4.5% at its next decision on March 8, but swap traders are betting the Bank of Canada could be forced to start hiking again as early as June.

The bank expects economic growth to be near zero in the first three quarters. It forecasts the headline rate of price pressures to fall to 3% by midyear, and return to 2% target by 2024.

“Getting back to the bank’s target rate of inflation will bring many benefits and help us sidestep many risks,” Beaudry said. “It will allow the economy to work more efficiently and avoid distortions that come with high and volatile inflation.”

Earlier Thursday, Macklem and Senior Deputy Carolyn Rogers defended the Bank of Canada’s decision to hold rates steady in a testimony to lawmakers.

Responding to a question after the speech on whether policymakers can adjust the 2% target in the current environment, Beaudry said while there have been more discussions about it globally, “the last thing you want to do is change your target when you’re in a difficult position.”

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