Macklem Expects BoC Next Interest Hike In June

The governor of the Bank of Canada is signalling Canada’s key interest rate could go up another half percentage point in June to help fight inflation and keep it under control.

Two weeks ago the central bank raised its key interest rate a half point to one per cent and warned more rate hikes would be coming as it works toward an inflation target of two per cent. Macklem says the bank will be considering another oversized, half-percentage-point interest rate increase at its next rate decision in June.

Canada’s inflation rate hit a three-decade high of 6.7 per cent in March, well above what the central bank projected in its January monetary policy report.

Macklem says Russia’s invasion of Ukraine has driven up the cost of energy and other commodities, and is further disrupting global supply chains, but says there is also domestic pressure on prices.

Bank of Canada Governor Tiff Macklem said the central bank will consider another 50-basis-point increase to its benchmark interest rate to wrestle inflation down from three-decade highs.

Speaking to lawmakers in Ottawa on Monday, Macklem said the decision to hike by half a percentage point earlier this month — the first time in more than 20 years — was an “unusual step” that officials could continue using at future meetings.

“We’ve signaled very clearly Canadians should expect further increases,” Macklem said at a parliamentary committee hearing. “Looking ahead to our next decisions, I expect we will be considering taking another 50-basis-point step.”

It’s the first time Macklem has acknowledged explicitly that another half-point increase is a serious option at the June 1 policy decision. Swaps trading suggests that an increase in the policy rate from 1 per cent to 1.5 per cent on that date is fully priced in. Markets are giving smaller odds of 75 basis point increase.

The central banker, though, appeared to downplay the likelihood that policy makers will move by more than 50 basis points. “I’m not going to rule out other options but anything bigger than 50 basis points would be very unusual,” Macklem said.

Short-term yields, already falling before Macklem’s testimony, dropped as investors pared back bets on an even larger hike. Canada’s benchmark two-year yield was at 2.524 per cent as of 1:10 p.m. Ottawa time — a drop of about 11 basis points from Friday’s close.

Odds of a 75-basis-point hike fell to about one-third, from more than 50 per cent earlier in the day. “At the margin he walked back some of the current market pricing for the upcoming meeting, where an even larger non-standard sized hike was starting to get priced.