Governor Tiff Macklem acknowledged that a further tightening of financial conditions due to global banking stresses could alter the future path of Bank of Canada interest rates.
(Bloomberg) — Governor Tiff Macklem acknowledged that a further tightening of financial conditions due to global banking stresses could alter the future path of Bank of Canada interest rates.
In a speech to the Toronto Region Board of Trade, Canada’s chief central banker reiterated Thursday that policymakers are prepared to hike again and noted that although global financial stability risks seem “contained,” a more severe flare-up would make achieving the 2% inflation target tougher.
“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,” Macklem said.
The loonie extended its rally after the speech, trading as high as C$1.3519 per US dollar before giving up some of those gains.
The comments suggest recent financial system stress is likely to be weighed more carefully as the Bank of Canada sets monetary policy in coming months, especially if accompanied by a deteriorating global outlook.
In a press conference after the speech, Macklem warned the Bank of Canada “would risk overtightening” if a deeper and lengthier spillover from global banking turmoil led to a tougher borrowing environment than was intended by the bank through its restrictive interest-rate setting.
Still, Macklem’s comments centered on getting inflation back under control, which he said will “take time.” He reiterated that bringing consumer price pressures to a 2% yearly pace from the 3% expected in coming months is “slower and more uncertain,” stressing that the central bank is prepared to hike again.
“We’ve all been through this rapid tightening cycle. We’re certainly all getting closer to the end,” Macklem told reporters. “We’ve paused — that doesn’t mean we’re necessarily at the end. It means we know there’s lags and we’re using this pause as the opportunity to assess whether we’ve done enough.”
He warned in his speech that “if we start to see signs that inflation is likely to get stuck materially above our 2% target, we are prepared to raise rates further.” The bank remains focused on employment growth and wages, service inflation, corporate pricing behavior and inflation expectations, Macklem said.
The central bank has separate tools to deal with price stability and financial stability independently, he said, noting that a “more pervasive” reemergence of financial stress could lead to “more significant” spillover effects into Canada. While the governor said financial stresses can “strike quickly,” he said again that the central bank is ready with a “range of tools” to provide liquidity in the event of a crisis.
First Republic Bank was seized by the US government and sold to JPMorgan Chase earlier this week, which Macklem flagged in his discussion. The sale was preceded by the failure of Silicon Valley Bank and Signature Bank in the US, as well as the government brokered takeover of Swiss giant Credit Suisse by rival UBS.
Regional bank stocks continued to sell off, including First Horizon, whose takeover was abandoned by Toronto-Dominion Bank earlier Thursday.
“It’s important to remember that the Canadian financial system has proven time and time again to be fairly robust,” Tiago Figueiredo, an economist at Desjardins Securities, said in a report to investors after the speech. “So any financial stability turmoil south of the boarder need-not translate into the same turbulence here.”
The banking stresses have prompted traders in overnight swaps markets to place bets on the Bank of Canada lowering rates by the end of this year, with a full 25-basis point cut priced by December. In recent communications, Macklem has poured cold water on that, saying it’s too early to be discussing any loosening of monetary policy.
Officials have kept the policy rate unchanged at 4.5% at the last two meetings of the Governing Council. The Bank of Canada’s next decision is June 7, with most economists expecting another hold.
–With assistance from Esteban Duarte.
(Updates with comments from press conference and economist reaction.)
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