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Bank of Canada Governor Tiff Macklem speaks during a news conference, on April 13 in Ottawa.Adrian Wyld/The Canadian Press

The Bank of Canada might consider hiking its benchmark interest rate by more than 50 basis points in a single move as it pushes borrowing costs higher to try to quell runaway inflation, Governor Tiff Macklem suggested on Thursday.

“I’m not going to rule anything out,” Mr. Macklem told reporters when asked whether the central bank would ever raise rates by more than half a percentage point in a single rate decision.

“We need to normalize monetary policy reasonably quickly, and we’re prepared to be as forceful as needed,” he said from Washington, where he is attending the spring meetings of the International Monetary Fund (IMF) and World Bank.

Mr. Macklem’s comments follow a half-percentage point rate hike last week – the Bank of Canada’s first oversized increase in two decades, which brought the policy rate to 1 per cent. The bank usually moves in quarter-point increments.

U.S. Federal Reserve Chair Jerome Powell made similarly hawkish remarks on Thursday. In a discussion hosted by the IMF, Mr. Powell said that a hike of 50 basis points would “be on the table” for the May meeting, and that “there’s something in the idea of front-end loading” interest rate hikes.

The Bank of Canada waited too long to start raising interest rates

This cemented market expectations that the Fed will raise its policy rate by half a percentage point on May 4, and could follow up with additional oversized moves this year.

The comments from the two central bankers underscore the dramatic shift in recent months, as inflation has continued to surge and central bank officials moved aggressively to protect their credibility as inflation fighters. The war in Ukraine has made their job more difficult, pushing food and energy prices higher and further disrupting global supply chains.

On Wednesday, Statistics Canada said the annual inflation rate in Canada hit a new three-decade high of 6.7 per cent in March – a full percentage point higher than in February and well above what Bank of Canada forecasters and Bay Street analysts expected.

The key concern for Mr. Macklem is making sure people don’t lose faith in the central bank’s ability to get inflation back to its target of 2 per cent.

“Part of the inflation should come down naturally, provided we keep inflation expectations well anchored,” Mr. Macklem said.

“If we don’t keep inflation expectations well anchored, if we let them become unmoored, then inflation will just get stuck at a new higher spot, and we really will have to slow down the economy a lot to get inflation back to target. That will be much more painful,” he said.

Even with the Bank of Canada’s half-point move last week, the policy interest rate needs to move significantly higher before it stops stimulating the economy and starts acting as a brake. The bank estimates the neutral rate – which neither stimulates the economy nor holds it back – lies somewhere between 2 and 3 per cent.

Mr. Macklem said the bank will move its policy rate back toward neutral levels quickly. Whether it pauses once it gets close or pushes interest rates higher depends on how the economy responds.

“We are going to be watching carefully the effect of higher interest rates on household spending, on households. We’re not on autopilot. If those bite and we really see demand slowing more quickly … once we’re up close to neutral, it may be appropriate to pause for a period,” Mr. Macklem said.

“On the other hand, we know households have accumulated quite a bit of extra savings through the pandemic, that could be somewhat of a buffer to higher interest rates,” he said.

Bank of Canada Governor Tiff Macklem warns of broadening inflation, signals aggressive rate hike path

Analysts and investors expect the bank to increase interest rates at each of its five remaining decision dates this year. That would move the policy rate above the prepandemic level of 1.75 per cent before the end of the year.

Many Bay Street economists have now pencilled in a move of 50 basis points for the Bank of Canada’s June 1 meeting, although some suggest the bank may need to be more forceful.

“There is even a solid case for the BoC to hike by 75 to 100 [basis points] in one shot,” Derek Holt, Bank of Nova Scotia’s head of capital market economics, wrote in a note to clients after the inflation report on Wednesday.

“Monetary policy tailored to current conditions should already be at neutral – if not above – given where inflation is and with a full employment recovery as the economy has moved into excess aggregate demand. Having failed to deliver that outcome, the second best option would be to get to the mid-point of the 2-3 per cent neutral rate range this summer, and preferably by July, in my view,” he wrote.

The challenge for the Bank of Canada and other central banks is to normalize borrowing costs without pushing their economies into a recession. Mr. Macklem said the Canadian economy is in relatively good shape. But he acknowledged that he will be walking a tightrope.

“I won’t pretend that this isn’t delicate,” he said.

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