OTTAWA: Hours after delivering the biggest interest-rate hike in 22 years in Canada, Tiff Macklem has a message for investors: There’s no reason to worry about inflation getting out of hand.
While there is plenty of uncertainty in the global economy, the Bank of Canada governor told Bloomberg News he’s quite certain that policy makers will be able to avoid a return of 1970s-style stagflation.
Macklem said the world’s central bankers have learned the hard lessons from letting inflation get too high. They’re adjusting policy quickly to avoid a scenario where price pressures remains elevated and the global economy sinks into a recession, he said.
“A lot has changed since the 1970s,” said Macklem, who earlier Wednesday delivered a half-percentage point rate increase in a bid to wrestle inflation down from a three-decade high.
“Central banks are going to be much more ahead of it than they were.”
In Canada, that means normalising monetary policy “relatively quickly” to keep demand in check and prevent inflation expectations from hardening, he said.
Macklem’s decision, which brought Canada’s policy rate to 1%, came on the same day New Zealand’s central bank lifted its official cash rate by half a percentage point to 1.5% earlier in the day.
A hawkish pivot is also expected in the United States, where Chairman Jerome Powell and other policy makers have put a half-point hike on the table for the Federal Reserve’s meeting in May.
On Wednesday, Macklem also provided guidance on how high interest rates could rise in Canada, saying he expects to see the policy rate to return to more normal settings of 2% to 3%.
But if needed, they could go even higher.
“The economy just does not work well when inflation expectations become unmoored, when inflation is high and variable,” Macklem said.
While market-based expectations have risen higher, they’re still “consistent” with inflation coming back to the bank’s 2% target, he said – adding that “we wouldn’t want to see them go further.”
Macklem said that while inflation is higher, there’s little evidence of recession risk.
The Bank of Canada is forecasting robust global growth of 3.5% in 2022, despite the pressures of Russia’s war in Ukraine.
In Canada, unemployment is at the lowest in more than 45 years and it “doesn’t look anything like stagflation,” he said.
Central bank officials are predicting real growth of 4.25% this year in Canada and 3.25% in 2023. — Bloomberg