By Steve Scherer and David Ljunggren
OTTAWA (Reuters) -Bank of Canada Governor Tiff Macklem on Wednesday said he was focused on whether interest rates would need to go higher and was not even considering a cut, pushing back against traders betting that the central bank will move lower as soon as October.
Macklem made his remarks in an interview with Reuters after earlier announcing a rate hike and saying the central bank would pause to see how the economy was reacting to tightening.
The announced pause hardened bets for a rate cut. Before the rate decision, money markets had been pricing in about 40 basis points of easing in the second half of the year. They now see nearly 50 basis points of cuts.
“As things start to get more back to normal, at some point, yes, we probably will be thinking about some modest cuts in interest rates,” Macklem said.
“But inflation is still over 6%. We’re not talking about cuts. We’re not even thinking about cuts … the question really we’re asking ourselves is, ‘Have we done enough?’ We’re pausing to assess whether we’ve done enough,” Macklem said.
The bank has lifted rates at a record pace of 425 basis points in 10 months to tame inflation, which peaked at 8.1% and slowed to 6.3% in December. But it is still more than three times the central bank’s 2% target.
The rapid rise in rates has cooled the economy, but a tight labor market risks causing spiraling wage growth and reigniting inflation. The central bank has said repeatedly it wants to raise rates enough to slow an overheated economy, but not so much that it will drive it into a deep recession.
“The bar is higher than it was last time for a further rate hikes,” Macklem said.
The biggest near-term risk is if the rapid reopening of the Chinese economy caused global commodity and oil prices to increase, which would push up global inflation, Macklem said.
Another key factor for the bank is whether inflation for the prices of services – which are less affected by higher rates – remains stubbornly high as 2023 progresses, making it harder to pull down the overall rate.
If services prices are sticky, “you’re not going to see inflation come down as we forecast and yes, in that case, we probably will need to do more,” said Macklem, speaking at the bank’s Ottawa headquarters.
Macklem, however, made clear the central bank would take as much time as needed to judge the effectiveness of the cumulative increase in rates and think carefully about the next steps.
The bank says inflation should fall to 3% later this year and down to 2% by the end of the next year, while making clear there are upside risks to the outlook.