Bank Of Canada's Hawkish Message Bolsters Case For Another Large Rate Hike

The Bank of Canada made clear on Thursday it will not yet be pivoting away from its current rapid pace of interest rate increases, with Governor Tiff Macklem saying there is no sign underlying inflation is easing.

The central bank has hiked its policy rate by 300 basis points to 3.25% since March, with four of those five increases larger than 25 basis points.

"We have yet to see clear evidence that underlying inflation has come down. When combined with still-elevated near-term inflation expectations, the clear implication is that further interest rate increases are warranted," Macklem told a business audience in Halifax.

"Simply put, there is more to be done. We will need additional information before we consider moving to a more finely balanced decision-by-decision approach."

Macklem added that while forward-looking indicators suggest that Canada's economy is starting to slow, labor markets remain tight and demand is still outstripping supply.

Economists said while there has been data in recent weeks that could have shifted the central bank to take a less hawkish stance, on Thursday the tone was clear.

"Don't expect the Bank of Canada to shy away from outsized interest rate increases any time soon," said Royce Mendes, head of macro strategy at Desjardins Group.

Following the governor's remarks, money market bets swung more heavily toward another 50-bp increase versus a 25-bp move at the upcoming Oct. 26 decision.

Macklem later said whether the central bank can cool the economy enough to tame inflation without triggering a recession will depend, in part, on how sticky price increases are in Canada.

"There is a path to a soft landing, but it is a narrow path and there are risks," he said, answering audience questions.

Inflation in Canada eased to 7.0% in August, with core inflation running at about 5%, which Macklem said was too high.

He added the central bank will be watching its core measures of inflation closely "for clear evidence of a turning point," particular as attention shifts to domestic price pressures.

But the bank's focus will be on the core measures known as CPI-trim and CPI-median, Macklem said, noting the central bank was reassessing the CPI-common measure due to recent large revisions.

Reuters reported this week that economists and markets were scrambling for a reliable measure of underlying inflation as large and frequent revisions have dented the credibility of CPI-common.

"CPI-common is becoming more difficult to use in real time because it has been subject to large historical revisions," Macklem said. "With this in mind ... we are reassessing CPI-common."

The Canadian dollar was trading 1% lower at 1.3740 to the greenback, or 72.78 U.S. cents.