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Governor of the Bank of Canada Tiff Macklem speaks at a press conference in Ottawa on June 9.PATRICK DOYLE/The Canadian Press

Bank of Canada Governor Tiff Macklem says the central bank may need to raise its benchmark interest rate to 3 per cent or above to bring inflation under control, and that the bank’s governing council is open to larger rate increases if needed.

This echoes remarks deputy-governor Paul Beaudry made last week and opens the door to an interest rate increase of 75 basis points at the bank’s next meeting in July.

“We may need to take more interest rate steps to get inflation back to target. Or we may need to move more quickly, we may need to take a larger step,” Mr. Macklem said in a Thursday news conference after the release of the central bank’s annual Financial System Review.

The bank’s governing council has raised interest rates three times since March, in an aggressive push to cool down Canada’s overheating economy and prevent people from losing faith in the bank’s inflation target. This has included two 50-basis-point moves – the first half-point rate increases since 2000 – bringing the policy rate to 1.5 per cent.

Officials have said in recent months that they intend to get the policy rate to a neutral level of between 2 per cent and 3 per cent relatively quickly. This description changed slightly last week: Bank officials now say there’s a growing chance they will need to move the policy rate to 3 per cent or above. A neutral rate neither stimulates the economy nor holds it back.

“Given that inflation looks like it’s going to go higher before it eases, given that inflation has been broadening and the economy is overheating, the likelihood that we may need to go to the top of that 2 to 3 per cent neutral range, or possibly somewhat above it to bring inflation back to target, has increased,” Mr. Macklem said.

Bank of Canada warns high household debt and elevated home prices pose top risks to economy

He said future interest-rate decisions will depend on incoming economic data.

Pushing borrowing costs higher will be a “delicate” task, Mr. Macklem acknowledged. Canadian households are heavily indebted and home prices have become severely stretched over the past two years.

The Financial System Review warned that high levels of household debt pose a growing risk to both the economy and the financial system as interest rates rise. Homeowners that stretched their finances to take on mortgages over the past two years are particularly vulnerable to a housing market correction or a cooldown in the broader economy.

Mr. Macklem said the bank will pay close attention to strains in the housing market, but this alone won’t determine the interest rate path.

“The housing market is an important part of the economy. We are watching it closely, but our focus ultimately is on the whole economy and in getting inflation back to target,” he said.

He added that households have managed to save a considerable amount of money, on average, over the course of the pandemic. This provides something of a buffer to higher interest rates, he said.

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