Bank of Canada Governor Tiff Macklem on Friday, speaking ahead of an interest rate decision on Oct. 25, said a recent surge in long-term bond yields is not a substitute for monetary policy and the economy is not heading for a deep recession.
The bank would “take into account” the tighter financial conditions due to higher long-term bond yields before its Oct. 25 policy announcement, Macklem told reporters in a call from Marrakech, Morocco, where he was attending an IMF meeting.
But those higher yields are “not a substitute for doing what needs to be done to get inflation to come back to our target,” Macklem said.
After Macklem’s comments, money markets increased bets on another rate increase at the next meeting to about a 36% chance, from 27% before.
Derek Holt, vice president of capital markets economics at Scotiabank, said he wanted to see September core inflation numbers due out on Tuesday, but added: “At this point, I think the case for an October hike is higher than priced.”
The Canadian dollar was trading 0.3% higher at 1.3647 to the greenback, or 73.28 U.S. cents.
The central bank has hiked interest rates 10 times in 18 months to a 22-year high of 5%, but it still does not see inflation slowing to its 2% target until mid-2025.
Growth unexpectedly shrank in the second quarter and stalled in the first two months of the third in Canada, while core inflation has proven sticky. The rate announcement will be accompanied by an update to the bank’s economic forecasts.
“We’re not going to be forecasting a serious recession,” Macklem said, responding to a question about whether the surge in long-term bond yields would increase the chance for a recession given the high number of mortgages that will have to be renewed in the next few years.
The five-year yield on Canada’s bonds has charged as high as 4.461% this month, its highest level in 16 years. Canada’s mortgage rates tend to track five-year bond yields with a lag and at a premium.
“The strength of the economy, the strength of the labor market, and to the extent that people have good jobs – they’re getting wage increases that will make it easier for them to digest the impacts when those mortgages are renewed,” he said.
Canadian home sales fell for a third straight month in September, anticipating that interest rates will stay at elevated levels for longer than previously thought.
In the upcoming policy deliberations, Macklem said the bank would be weighing whether to let previous rate hikes work through the economy or raise again to counter sticky inflation.
“What we’re looking for are clear signs that core inflation, underlying inflation, those pressures are easing and inflation is going to be coming down,” Macklem said.
Separately on Friday, the Parliamentary Budget Officer (PBO)forecasted the central bank would keep its key overnight rate at 5% through the first quarter of next year.
“Following the contraction in real GDP in the second quarter, we project the Canadian economy to stagnate in the second half of this year and growth to remain weak through the first half of 2024,” PBO Yves Giroux said.
Source : Reuters
