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Bank of Canada governor says interest rate hikes still possible

Higher for longer rates that are not expected to cause a recession

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Bank of Canada Governor Tiff Macklem says higher interest rates are helping to reduce inflation, but with new geopolitical unrest in the Middle East and underlying inflation proving “tough,” he did not rule out further rate hikes. rates.

“The fight against inflation is not over,” Macklem said from Marrakech, Morocco, where he will meet his international counterparts at the International Monetary Fund meetings. “We need to be prepared for continued volatility.”

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Macklem said he believes Canada can return to the central bank’s two per cent inflation target without triggering a major economic slowdown.

“We don’t expect a recession in Canada,” Macklem said, adding that the Bank of Canada will release its outlook for the economy on Oct. 25 with its next interest rate decision.

“We are not going to predict a serious recession,” he said.

Macklem noted that so far, the rapid rise in overnight interest rates over the past year and a half after a prolonged period of historically low rates has not led to large increases in unemployment.

However, in May, the IMF included Canada among a short list of countries, including Australia and Sweden, where rising interest rates and high household debt combined to create the highest risk of mortgage default among 38 countries of the Organization for Economic Cooperation and Development. .

Macklem said the small group of countries highlighted by the IMF, including Canada, saw increases in home buying during the COVID-19 pandemic and those buyers now face higher interest rates, or will soon do so when their mortgages come up for renewal. .

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“That certainly creates a burden on people, especially if you buy it right at the peak,” he said.

But the pandemic also led to more savings for some households, which should mitigate the impact as mortgages roll over at higher rates, he said, noting that central bank research shows rising rates are not having the same impact on all homes in Canada.

“Some people have used those deposits to pay their mortgages and they are still being squeezed,” Macklem acknowledged.

“Other Canadians, their mortgage hasn’t been refinanced and I think a lot of them are planning for the fact that their mortgage is going to be refinanced and so they’re holding on to those deposits so that when it comes up for renewal, they’re maybe able to make a balloon payment or they certainly can face those higher costs.”

Macklem said these higher savings rates are making it harder to control inflation.

He said factors such as rising long-term bond yields – which make borrowing more expensive and could cool demand without central banks having to raise the overnight rate – will be weighed when the central bank makes its next decision on rates at the end of this month.

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“Obviously, the higher the longer-term rates, the bigger the impact,” Macklem said.

He added that long-term bond trends must be weighed against other factors such as the strength of the economy and the labor market.

“The other thing I would say is that to the extent that higher long-term rates reflect expectations of future monetary policy, they are not a substitute for doing what is necessary to get inflation back to our target.”

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The central bank left the overnight rate unchanged at five percent in its last rate-setting announcement on Sept. 6, but a further rate hike was considered during deliberations for that decision as underlying inflation remained stubbornly high.

Macklem said he and the IMF counterparts he met with in Morocco focused on people affected by escalating violence in Israel and Gaza and that it is too early to say what impact the Middle East conflict will have on the global economy. .

“Obviously the immediate focus is on the human consequences of this. “It’s hard not to be incredibly moved by the depth of this tragedy,” Macklem said. “The short answer in terms of economics is too early to tell, and it really depends on how much this escalates.”

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