Increased interest rates will make it more difficult for Canadians to pay down their debt, but tightened monetary policy was necessary to help slow out of control inflation said Bank of Canada Governor Tiff Macklem this morning.
The central bank raised interest rates yesterday by 0.25 points to 0.50 per cent, the first increase since 2018. Recent economic improvements, steady household spending, and inflation numbers that are "well above" the BoC's preferred two per cent range were the lead drivers in its latest policy decision, explained the bank.
“The impact of raising our policy rate will be higher interest rates for Canadian households and businesses, including many mortgage and prime lending rates, but also rates for savings products,” stated Macklem.
“The economy is now in a place where moving to a more normal setting for interest rates is appropriate. The economy can handle it. We know this will be a significant adjustment, and we fully intend to tighten policy in a deliberate and careful way, being mindful of the impacts and monitoring the effects closely. The bank is committed to returning inflation to the 2 per cent target and keeping inflation expectations well anchored.”
Macklem explained that three factors have pushed the country's inflation level above five per cent. Those three factors include a global deviation to buying goods and not services over the past two years, extreme price increases to food and gas that have undoubtedly been affected by interruptions to logistics and the supply chain, and a total disparity between demand in supply in the country's economy.
“As the pandemic recedes, we can expect consumers to shift back to spending more on services, and this should take some pressure off global demand for goods,” Macklem said. “We can also expect supply chains to normalize. But predicting how long this will take is difficult. And the war in Ukraine is compounding this difficulty, as it could also have implications for global supply chains.”
“We expect inflation to come down in the second half of this year as the pandemic eases,” added Macklem.
“But with inflation substantially above our target, we are more concerned about the upside risks to our inflation outlook. The broadening of price increases is making inflation harder to avoid and raises the risk that inflation expectations could drift higher. And with slack now absorbed, the momentum in demand means that monetary policy has a clear role to play in getting inflation back to our target.”