Bank of Canada Deputy Governor Sharon Koziki hinted on Friday that raising interest rates by half a percentage point may be on the table for the central bank’s forthcoming interest rate decision in mid-April. In her first speech since joining the bank’s board last summer, Kozicki said the central bank was “ready to act vigorously” to bring high inflation under control. He also argued that Canadian households are better prepared to handle rising interest rates than they were in the last round of interest rate hikes in 2017 and 2018. “I look forward to the pace and magnitude of interest rate hikes and the start of it [quantitative tightening] to take an active part in our discussions on our next decision in April, “he said in a keynote address at the Federal Reserve Bank of San Francisco monetary policy conference. The quantitative easing refers to the contraction of the central bank of its government bonds. “The reasons are clear: inflation in Canada is very high, labor markets are tight and there is significant demand demand,” Kozicki said. This follows remarks by Bank of Canada Governor Tiff Macklem in early March that the bank did not rule out raising the interest rate by 0.5 percentage points instead of the usual 0.25 percentage points – something that has not happened since May 2000. After keeping interest rates close to zero for two years, the Bank of Canada began a round of monetary tightening in early March. It raised its policy rate to 0.5 percent from 0.25 percent and signaled more interest rate hikes imminent. Economists and investors expect the bank to move fast. Financial instruments tracking market expectations for interest rate hikes suggest that the bank will raise its policy rate on each of the six remaining decision-making dates in 2022. This would move the policy rate above its pre-epidemic level. 1.75%. Royce Mendes, head of Desjardins’ macroeconomic strategy, said Ms Kozicki’s aggressive statements on Friday raised a half-point increase in the April 13 interest rate decision. “We continue to believe that the Bank of Canada will increase its base base by 25 basis points in April as the quantitative easing program begins. “However, the risks are moving towards both a faster rate and a higher terminal rate for this cycle than the top 2 percent we currently have in pencil,” Mendes wrote in a note to customers about speaking. The Bank of Canada is battling relentless inflation, which hit an annual rate of 5.7% in February – almost three times higher than the bank’s 2% inflation target. Rising oil and agricultural commodity prices, which have soared as a result of Russia’s invasion of Ukraine, are putting additional upward pressure on inflation. “With everyday items such as gas and grocery stores experiencing some of the fastest price gains, all households are affected by high inflation. “But my colleagues and I are aware that this is particularly painful for those on low incomes, as they tend to spend more of their profits on such items,” Kozicki said. The problem with today’s sharp inflation? The constant reminders Opinion: A realistic guide for winners and losers in the wave of interest rate hikes that has just begun Persistently high inflation has forced Canada’s central bankers to move hard away from the easing they have held for much of the COVID-19 pandemic. The US Federal Reserve has taken an even sharper turn. After the Fed raised its policy rate last week for the first time since lowering it at the start of the pandemic, President Jerome Powell said this week that the central bank needed to move “fast” toward tighter monetary policy. Markets are now pricing in several increments of 0.5 percentage points from the Fed this year. Ms Kozicki’s speech painted a mixed picture of how Canadian households could be affected by rapidly rising interest rates. On the one hand, Canadians have saved an average amount of money over the past two years as a result of generous government support and lower spending due to health constraints. This could help mitigate the impact of rising monthly interest payments. In addition, most Canadian homeowners have fixed-rate mortgages, which means they will not see their monthly payments increase until they renew their mortgage agreements. At the same time, total household debt is above pre-pandemic levels, thanks in large part to rising real estate prices. That equates to “a significant domestic vulnerability,” Ms Kozicki said. “High debt could increase the impact of rising interest rates and could also exacerbate the impact of a future shock,” he said, noting that people seeking mortgages – especially floating rate mortgages – could from higher monthly payments, which would force them to reduce their consumption of other goods and services. “If many of them actually cut spending, it could affect the whole economy, such as slowing growth or raising unemployment. “A drop in house prices could exacerbate these effects.” Overall, he said, Canadian households are in better financial shape now than at the beginning of the last round of tightening bank interest rates in 2017. Your time is precious. Deliver the Top Business Headlines newsletter to your inbox in the morning or evening. Register today.
