After handing out the most significant interest rate hike in 22 years in Canada, Governor Tiff Macklem had a message for investors that said there was no reason to panic about inflation getting out of hand.
The inflation will be under control
Macklem told Bloomberg News that despite the global economic uncertainty, he was sure that the policymakers would not repeat 1970s types of stagflations.
According to Macklem, the central bankers globally have allowed inflation to get high and are now adjusting policy quickly after learning the hard lessons.
Macklem delivered a half percentage point rate increase to bring down inflation from a three-decade high. He feels many things have changed since the 1970s, and Central banks are much ahead of what they used to be.
Macklem’s rate hike decision to the policy rate of 1% in Canada was carried out on the same day New Zealand central bank also official rate by 0.5 % point to 1.5%. A hawkish policy is also expected in the U.S. Federal meeting in May, where Fed Chair Jerome Powel and other policymakers are expected to hike rates by 0.5%.
Macklem said on Wednesday that the interest rates rate could rise to 2% to 3% and even go higher up. He said that economy does not work well when the inflation s variable and high. When the market expectations have risen higher, the inflation is coming down to the bank’s target of 2%, adding that he would not like to see them go up further.
Bank of Canada is predicting a 3.5% robust growth rate in 2022, and even though the inflation is higher, there is hardly any evidence of risk of recession. Unemployment is the lowest in Canada in the last 45 years, with no signs of stagflation.
Central banks predict growth of 4.25% in 2022 and 3.25% in 2023 in Canada. This rate is well above the country’s long-term speed limit, and it is also better than many peer countries, including the U.S., which is growing at 2.8% in 2022.
Canada outperforming is due to its resource-based economy getting buffered by high commodity prices that have resulted from the Ukraine war. Also, because of strict Covid -19 restrictions, Canada had come out slowing from the pandemic.
Macklem remains optimistic that higher rates will slow down demand and inflation without causing significant disruption in the economy. He declined to characterize the current inflation as a crisis. This optimism is based on certain assumptions like increased business investment, improvement in the supply chain, and productivity after Covid restrictions are withdrawn.
A 2% inflation target guides the bank of Canada in response to its high inflation in the 1970 era. Macklem said that price stability must be focused upon; otherwise, nothing else will work.
