Bank of Canada | It is possible to raise interest rates without triggering a recession

(Ottawa) Bank of Canada Governor Tiff Macklem says it is possible to counter inflationary pressures domestically by raising interest rates without triggering a recession.

Posted on 04/25

Joel Denis Bellavance

Joel Denis Bellavance
The press

Inflation hit a 30-year high of 6.7% in March. Some pundits believe the Bank of Canada may need to find a powerful tool to stem price increases that are hitting all sectors — a tool that could pull Canada’s economy into recession.

Speaking to elected officials Monday for the first time since the Bank of Canada ordered a 50 basis point rate hike two weeks ago, Macklem said the Canadian economy was enjoying a period of strong growth and could absorb further hikes.

A hike of at least 50 basis points also appears warranted in June, he said during a two-hour hearing before the House of Commons Finance Committee.

Mr Macklem pointed out that bringing inflation back into the 2-3% range as mandated by the Bank of Canada will not be an easy task. In normal times, the Bank of Canada prefers a 0.25% hike in interest rates. But inflation must be brought under control at all costs and as soon as possible, he argued.

“We have signaled to Canadians to expect more rate hikes. We said we had to normalize monetary policy fairly quickly. When estimating our next move, the usual move would be 25 basis points. But we expect a 50 basis point rise. I wouldn’t rule out other possibilities, but anything over 50 basis points would be very unusual,” he explained.

Cautious optimism

When asked if the drug he is now considering could make Canada’s economy cough, the governor said he was cautiously optimistic. He said the unemployment rate hit an all-time low of 5.3% last month and there were hundreds of thousands of job vacancies. In addition, the current key interest rate of 1% is still below the level before the COVID-19 pandemic.

“The economy needs higher interest rates and can handle it. Demand is beginning to exceed our production capacity. We need higher interest rates to restore balance to the economy and moderate inflation in the country. Higher interest rates are also needed to keep Canadian inflation expectations on target. [de la Banque du Canada] said Governor Macklem.

“We believe the economy can grow and inflation can be controlled. I’m not saying it won’t be difficult. […] Are there risks? Yes, of course there are risks. All I would say is that we will make the decisions one at a time and see how our interest rates affect the economy. We will also monitor their impact on inflation and base our decisions on the needs of the economy,” he added.

During his testimony, Mr. Macklem acknowledged that the rate of inflation was significantly higher than the Bank of Canada forecast earlier in the year. At the time, she was still claiming that inflationary pressures were temporary.

But the Russian-bred war in Ukraine, rising oil prices and recent containment measures in China due to the COVID-19 pandemic have changed the game and led to further supply chain disruptions.

“All of these factors not only increase inflation, they last longer,” agreed Tiff Macklem, who wore a Ukrainian flag pin on his jacket. “Much of the inflation we have now is coming from outside our borders. […] The war in Ukraine has pushed up prices for energy and other commodities, further disrupting global supply chains. The factors driving inflation come from abroad, but given the slack in the economy, we also have to deal with internal price pressures. »

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