Central bank: business investment integral to interest rate hikes

Central bank : business investment integral to interest rate hikes

Bank of Canada Governor Tiff Macklem believes the pathway to interest rake hikes will rely on if the country's businesses increase investments as the economy slowly bounces back from the pandemic.

Two weeks after holding interest rates at record lows, the governor said today he would "“act deliberately and communicate clearly” as he starts to elevate borrowing costs. He made it very clear though, that businesses have an integral role in making this process as seamless as possible.

“Productivity growth is vital to non-inflationary growth and rising standards of living,” Macklem said, in prepared remarks of his speech to the Canadian Chamber of Commerce. “At a time when inflation is already well above our target, this is more vital than ever.”

In it latest policy decision on January 26th, the Bank of Canada announced it would be raising borrowing costs fairly soon to help curtail inflation. Many analysts are expecting an increase in the central bank's next decision on March 2nd, with some estimating as many as six increases over the course of this year.

In his speech this morning, Macklem said the rise in demand for goods during the pandemic contributed to a sizable part of price gains and that he believes inflation will be back down to about 3 per cent by year's end. In December, consumer price growth reached 4.8 per cent, the highest figure in over thirty years.

The country's elevated inflation “is not the result of generalized excess demand in the Canadian economy,” Macklem said. “Our economy is only just now getting back to full capacity.”

Increased interest rates are required though, to bring inflation back to the BoC's 2 per cent target. The governor was intent on assuring the business sector that the central bank is devoted to making that happen.

“As businesses set prices and wages, firms and workers alike can be assured that the Bank of Canada will use its monetary tools to control inflation,” he added.