As inflation ticks ever higher, Macklem won't rule out super-sized rate hike

With inflation showing no signs of abating despite hitting its highest level in more than 30 years, the head of the Bank of Canada opened the door to bigger and faster rate hikes to try to rein in the runaway increase in the cost of living.

Speaking from Washington, D.C., on Thursday, where he was attending meetings of the International Monetary Fund and World Bank Group as well as meetings of G7 and G20 central bank governors and finance ministers, Bank of Canada Governor Tiff Macklem didn't rule out increasing the central bank's benchmark interest rate by 50 basis points or more at its next policy meeting in June.

Like most central banks around the world, the Bank of Canada slashed its interest rate when the pandemic started in March 2020 in an attempt to assuage fears and make sure borrowing was as affordable as possible to encourage investment. Typically, central banks lower their interest rate to encourage borrowing and investing to stimulate a sluggish economy, and they raise rates to cool things down amid high inflation.

Two years after slashing borrowing costs to as low as they've ever been, those record-low rates have been accused of contributing to inflation, which has risen to its highest level in decades. In March, the Bank of Canada raised its benchmark rate by a tiny amount, 25 basis points or a quarter of a per cent, to signal the era of cheap lending was coming to an end.

Central banks prefer to move cautiously in any direction, moving rates in 0.25-percentage-point increments when possible, so it was noteworthy when the bank followed that small hike with a larger one, of 50 basis points this month. That moved the bank's rate to one per cent, still well below where the rate was before the pandemic, but it was the first time in more than 20 years that the bank hiked by that much in one fell swoop.

With Canada's inflation rate at an eye-watering 6.7 per cent, investors in financial instruments known as swaps suggest another big hike of half a percentage point at the bank's next meeting in June is all but certain. And there's even a decent chance of an even bigger one of 75 basis points or more.

"It could certainly happen," Bank of Montreal economist Doug Porter told CBC News in an interview Friday. He noted that the next planned rate decision in early June is more than a month away, and the bank will have a slew of important data points between now and then, including another inflation number for April.

"Why not consider ... very unusual possibilities? Because we are in a fairly exceptional circumstance here," Porter said.

WATCH | Canada's inflation jumps to 31-year high:

Macklem did little to douse those speculative flames in his comments. Although CBC was not able to attend his virtual remarks and there was no transcript, Scotiabank economist Derek Holt quoted Macklem as saying he was "not going to rule anything out" in terms of the size of any rate hike. "We're prepared to be as forceful as needed and I'm really going to let those words speak for themselves," Macklem reportedly said.

Macklem also said ongoing supply chain disruptions, the war in Ukraine and spike in COVID-19 cases in China will likely make high inflation linger for longer than anticipated. Earlier this month, the bank said it doesn't expect inflation to get back into the range of between one and three per cent that it targets until the latter half of next year.

"He also reiterated how a pause would only be entertained once the policy rate was in the neutral rate range," Holt said, referring to the level where interest rates reach a Goldilocks level where they are neither stimulating the economy, nor holding it back. Most economists think that so called "neutral range" is a bank rate of somewhere between two and three per cent, well above its current level.

"There remains somewhat of an inconsistency between saying they are not on autopilot while also saying they won't pause until they get into a neutral range," Holt said.

Canada isn't the only country mulling faster and bigger rate hikes. Earlier Thursday, Federal Reserve chairman Jerome Powell reiterated that a 50 basis point interest rate hike is possible in May, after one Fed member had suggested a 75 basis point jump can't be ruled out as inflation there is now up to 8.5 per cent, it's highest level since 1982.