MNI: BOC Shifts To Say It's More Likely To Hike Above Neutral

The Bank of Canada is more likely to lift interest rates above neutral to prevent entrenched high inflation that would require a much more forceful response, Deputy Governor Paul Beaudry said Thursday.

Discussing deliberations for Wednesday's hike to 1.5% from 1% he reiterated the Bank can "act more forcefully if needed," a phrase investors take to mean a 75bp hike is possible at July's meeting.

"Price pressures are broadening and inflation is much higher than we expected and likely to go higher still before easing. This raises the likelihood that we may need to raise the policy rate to the top end or above the neutral range," Beaudry said in the text of a speech that will be followed by audience questions and a press conference.

The Bank estimates the neutral rate from 2% to 3% and Beaudry's comments are a switch from April when the Bank said it could pause hiking around neutral to assess drags such as heavily indebted consumers. Beaudry also made candid admissions the Bank misread signs of persistent inflation and the rapid economic rebound following waves of Covid, suggesting more of a catch-up is needed now.

"We are taking these large steps because inflation has been persistently high, the economy is overheating, and the risk that elevated inflation will become entrenched has increased," he said. "The Governing Council is steadfast in its commitment to return inflation to the 2% target and is prepared to act more forcefully if needed."

The Bank hasn't hiked by 75 basis points since a 1pp hike in 1998. Beaudry didn't state when that goal would be reached again. Inflation has reached 6.8% and has topped 2% for more than a year. It may soon climb to the fastest since the early 1980s, before the current system of targeting 2% price gains.

"The bottom line is that the risk is now greater that inflation expectations could de-anchor and high inflation could become entrenched," he said. "There is no longer a trade-off: we must raise interest rates, both to bring demand in line with supply and to ensure entrenched inflation cannot take hold."

There was little sign the Bank saw a risk of a hard landing, noting the economy is overheating amid record job vacancies and momentum in output growth.