© Reuters. FILE PHOTO: Bank of Canada Governor Tiff Macklem walks outside the Bank of Canada building in Ottawa, Ontario, Canada, June 22, 2020. REUTERS/Blair Gable/File photo
By Steve Scherer and Ismail Shakir
OTTAWA (Reuters) – Canada’s inflation remains too strong and interest rates need to be raised to cool an overheated economy, Bank of Canada Governor Tiff Macklem said in testimony to the House of Commons on Wednesday.
“Inflation has come down in recent months, but we haven’t seen a general decline in price pressures,” Macklem said. “This austerity phase is coming to an end. We’re getting closer, but we’re not there yet.”
Canada’s annual Inflation was unchanged at 6.9% in the same month, data last week showed, still well above the central bank’s 2% target, while core inflation measures were mixed.
“We expect (inflation) to remain fairly elevated for the remainder of the year. It will start to decline next year,” Macklem told members of parliament. “We are determined to get inflation back to our target.”
The Bank of Canada hiked interest rates by 50 basis points last month, bringing the policy rate to 3.75%, the highest level since 1999 The highest level was 4% in January 2008. It also forecasts stagnant growth from the fourth quarter of this year to the middle of next year.
Money markets have fully discounted a further 25bp tightening with a 20% chance of a 50bp rate hike at the Bank of Canada’s next policy decision on Dec. 7.
Conservative lawmakers urged McCallum to explain what banks should have done differently to avoid a spike in inflation.
Macklem reiterated that, “in hindsight”, the bank should have started tightening monetary policy earlier, adding that the bank would review how its monetary tools were functioning during this period.
“When we get inflation all the way back down to 2%, I think we’re going to have to overhaul how all of our tools work,” he said.
Conservative Party leader Pierre Poilievre said he would fire Macklem and blamed quantitative easing for fueling price increases.