By Julie Gordon and David Ljunggren
OTTAWA (Reuters) – The slack in Canada’s economy caused by the coronavirus pandemic has substantially diminished, the Governor of the Bank of Canada said on Wednesday, a key sign the central bank is set to begin hiking rates soon.
Tiff Macklem, in his final appearance of the year, also said the central bank was “not comfortable” with inflation, which is at an 18-year high of 4.7% and well above its control range of 1-3%.
“The significant amount of slack that you did have in the economy is substantially diminished,” he told reporters after speaking to a business audience. He also said labor market slack had been absorbed to a “significant degree.”
The bank says it will hold interest rates at record lows until economic slack is sustainably absorbed, which is currently forecast to happen in the middle quarters of 2022. Money markets expect a first hike in March or April.
Macklem reiterated that the bank expected inflation to stay above target into next year, falling back toward 2% by the end of 2022.
“Inflation is elevated. It is well above our target and we are not comfortable with where we are,” he earlier said in an audience Q&A after his speech, adding it is being driven by global supply chain bottlenecks.
Addressing the Bank’s policy framework more broadly, Macklem said it may need to lower rates to their effective lower bound (ELB) more often and therefore have to use alternative stimulus, like forward guidance and quantitative easing, to a greater extent to tackle future shocks.
In March 2020, the bank slashed its benchmark rate to 0.25%, a record low and the current ELB, as the pandemic took hold. It also launched its first-ever quantitative easing program and said rates would stay low for a prolonged period.
The bank in October ended its QE program, but maintained its forward guidance that rates will stay low for long. Macklem did not answer directly when asked whether that guidance would need to be removed before a hike.
To the south, the U.S. Federal Reserve, signaling its inflation target has been met, on Wednesday said it would end its pandemic-era bond purchases in March.
The Canadian dollar was trading 0.3% lower at 1.2905 to the greenback, or 77.49 U.S. cents.
(Additional reporting by Fergal Smith in Toronto; Editing by David Gregorio and Nick Zieminski)
