Bank Of Canada Says Inflation Will Dictate Pace, Size Of Rate Hikes

Bank of Canada Governor Tiff Macklem on Thursday said inflation would dictate how fast interest rates go up, reiterating that the bank might need to make more increases in a row or consider a move larger than 50 basis points.

Macklem, answering questions after the release of an annual financial system review, made clear getting inflation back to the 2% target was the central bank's No. 1 priority, though it hoped to avoid cooling the economy too much.

The bank raised its benchmark rate to 1.5% from 1.0% last week and said it was prepared to act "more forcefully" if needed to curb inflation, currently running at a 31-year high.

"What we're indicating is we may need to take more steps... to get inflation back to target or we may need to move more quickly, we may need to take a larger step," Macklem said.

"The most important factor really is the outlook for inflation," he later said.

Macklem also said the bank needed to bring domestic demand more in line with supply, without overcooling the economy.

"We don't want to choke off demand. We want to get rid of the excess demand, the excess part of it," he said.

In the earlier report, the bank said Canada's financial system faced an increased risk from highly indebted households with more people vulnerable to rate hikes after stretching to buy homes at elevated prices.

"The Bank is paying particular attention to the fact that a greater number of Canadian households are carrying high levels of mortgage debt," it said, highlighting a sharp increase in high ratio mortgages.

"These households are more vulnerable to declines in income and rising interest rates," it said.

But while overall risks to Canada's financial system have become more elevated in the last year amid geopolitical tensions, high inflation and rising interest rates, key institutions remain resilient, the bank said.

The Canadian dollar was trading 0.7% lower at 1.2650 to the U.S. dollar, or 79.05 U.S. cents, as the greenback rallied against a basket of major currencies.