BoC’s Macklem: Rate decisions must look beyond initial Oil shock
Bank of Canada (BoC) Governor Tiff Macklem, speaking in Halifax, Nova Scotia, on Monday, offered a cautious assessment of the economy as higher energy prices and US tariffs create competing risks for inflation and growth.
Key takeaways
"If oil prices stay near $100 a barrel, we'd expect inflation to edge up in the coming months".
"Fuel prices have risen more than we'd normally expect, reflecting damage to global refining capacity".
"Recent gas prices have been more consistent with an oil price almost $40 higher than where it has been".
"If new US tariffs remain in place, Q4 growth could be roughly halved to below 1%".
"There is growing evidence that many Canadian businesses have started to adapt to US tariffs".
"We don't want to raise rates and restrain growth if inflationary pressures are contained".
"so far we haven't seen evidence that higher oil prices are spreading to other goods and services".
"When it comes to rate decisions, we need to look beyond the initial shock of higher oil prices".
"Nor do we want to be too slow to respond if inflationary pressures are becoming more persistent".
"The bank expects that growth in the labor force will be close to zero over the next few years".
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.