Bank of Canada Governor Tiff Macklem’s decision to deliver the biggest interest rate hike in a generation hasn’t sapped his optimism about the nation’s outlook.
Though he surprised markets by cranking up the policy rate by a full percentage point to 2.5 per cent, Macklem tried to fuse his hawkish language around inflation with a soft-landing scenario as the most likely outcome in Canada.Doing so assumes that the tightening cycle will be short-lived with rates barely moving into restrictive territory, and that the combination of high inflation and a weak housing market doesn’t seriously derail consumer spending.
Macklem told reporters after Wednesday’s decision that the policy rate may only need to rise slightly above 3 per cent, the top end of what the bank considers the neutral range, in order to prevent a wage-price spiral. “Given the extremely aggressive rate hike, that more hikes are coming, and the multi-decade highs in inflation, the path to a soft landing for the Canadian economy may not be achievable,” Benjamin Reitzes, a rates strategist with Bank of Montreal, said by email.
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