BoC's Macklem: Not comfortable with where inflation is ― Globe & Mail

The Globe & mail last Friday published remarks from the Bank of Canada's governor Tiff Macklem made in an interview on Wednesday, Jan 26 following the central bank's decision to hold on rates. 

"I'm not comfortable with where inflation is, but I don't regret the actions we took," the news agency reported him saying to them.

Key comments

"Interest rates very clearly have to go up to dampen spending and bring demand in line with supply," Mr. Macklem told The Globe. 

"I think that deliberate approach where we are clear with Canadians on how we see things and what we think needs to happen has been very helpful through this crisis," Mr. Macklem said.

"We're starting at ultralow. And it's clear we need to move up. At first, I think the implications are fairly obvious for interest rates. The further down the path you get, the more finely balanced those decisions will become, the more data-dependent they will become," Mr. Macklem said, seeming to suggest the first few hikes could happen soon.

"I have a lot of time for the argument that the bank wanted to put distance between rate hikes and the Omicron lockdown, and I don't think it's likely that there will be much, if any, damage done to their credibility by waiting the five weeks," Mr. Kelvin said in an interview.

"But waiting until April, given where inflation is, it does start to run the risk of inflation expectations becoming unanchored, which would make the bank's task going forward far more difficult."

"By inflaming the housing market side of the picture, the combined effects of hot inflation and hot asset prices I worry could be destabilizing to the economy and the financial system over time," Mr. Holt said in an interview.

"If you're Canadian and you have a variable rate mortgage, we're effectively telling you that you can expect that variable rate mortgage is going to go up," he said.

"It's also important to remember that the federal mortgage stress test, while very helpful for lenders to gauge whether a household could handle higher mortgage rates, doesn't provide a certificate of perfect financial health," Mr. Beaudry said.

"Whether a household could withstand higher rates without slashing other spending depends on how well it manages its finances overall before rates rise," he said.

"We think it would be healthy to see some gradual slowing in the housing market. We can't sustain the kind of strength in housing we've seen. I think that would be a good thing, not a bad thing," Mr. Macklem said.

"I've learned this now a few times in my career," he said. "I remember this after 9/11; I remember after the global financial crisis. We lowered interest rates and people said, 'Well, this is a terrorist attack, monetary policy is not going to work. This is a financial crisis, monetary policy is not going to work. This is a pandemic, monetary policy is not going to work.' Well, it works.

"It worked on the downside," he said. "It's going to work on the upside."

Market implications

The comments from last week will have already started to have made their way through to the price, although they may get some more traction this week as sentiment shifts to central banks again. The Reserve Bank of Australia, the European Central Bank and the Bank of England are all slated for the week ahead. Hawkish tones all around will likely cement the prospect of a 50bp at the BoC which would be expected to underpin the loonie. Meanwhile, the focus will be on January jobs data in Canada this week, which will offer traders the opportunity to measure the impact of Omicron restrictions in the country.