Key interest rate could soon go up another half point, central bank says

OTTAWA — Canada’s key interest rate could go up another half percentage point in June to help wrestle inflation under control, Bank of Canada governor Tiff Macklem signalled Monday.

“Inflation is too high. It is higher than we expected,” Macklem told the House of Commons standing committee on finance. “And it’s going to be elevated for longer than we previously thought.”

Two weeks ago the central bank raised its key interest rate a half point to one per cent and warned more rate hikes would be coming as it works toward an inflation target of two per cent.

Macklem said that in looking ahead to its next decisions, “we will be considering taking another 50−basis−point step.”

“The economy needs higher rates and can handle them,” he said. “With demand starting to run ahead of the economy’s capacity, we need higher rates to bring the economy into balance and cool domestic inflation.”

Canada’s inflation rate hit a three−decade high of 6.7 per cent in March, well above what the central bank projected in its January monetary policy report.

Russia’s invasion of Ukraine has driven up the cost of energy and other commodities, and is further disrupting global supply chains, but there is also domestic pressure on prices, Macklem said.

The central bank foresees inflation averaging almost six per cent in the first half of this year and remaining elevated for the remainder of 2022, then easing in the second half of next year before returning to the two−per−cent target in 2024.

Inflation at five per cent for a year, or three percentage points above the bank’s target, costs the average Canadian an additional $2,000, Macklem said.

“And it’s affecting more vulnerable members of society the most because they spend all their income and because prices of essential items like food and energy have risen sharply,” he said.

“We are committed to using our policy interest rate to return inflation to target and we will do so forcefully if needed.”

Macklem acknowledged that seeing mortgage payments and other borrowing costs increase as a result can be worrying for Canadians.

“We will be assessing the impacts of higher interest rates on the economy carefully,” he said.

People should expect rates to rise toward a range the central bank considers “a neutral interest rate that neither stimulates nor weighs on the economy,” which the bank estimates to be between two and three per cent, he added.

This report by The Canadian Press was first published April 25, 2022.

The Canadian Press

Note to readers: This is a corrected story. An earlier version misspelled Tiff Macklem’s first name.