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

The Bank of Canada is prepared to raise interest rates “forcefully if needed” to get inflation under control, Governor Tiff Macklem said Wednesday, doubling down on the message that Canadian households and businesses should brace for higher borrowing costs over the coming year.

Speaking to the Senate Committee on Banking, Trade and Commerce, Mr. Macklem said that the central bank needs to push interest rates up relatively quickly to cool down Canada’s overheating economy. At the same time, he acknowledged his team will be walking a fine line as it attempts to dampen demand in the economy without causing a recession.

“If you boil it down, the economy is overheating, that’s creating domestic inflationary pressure,” Mr. Macklem said in his second Parliamentary appearance this week. He spoke to the House of Commons Finance Committee on Monday.

“We need to cool growth to cool inflation. We don’t want to overcool the economy, but we don’t want it overheating and creating inflation. So yes it’s going to be delicate,” he said.

The back-to-back appearances before Parliament come as the central bank proceeds with the fastest monetary policy tightening cycle in decades in an effort to tackle scorching consumer price growth that hit a three-decade high of 6.7 per cent in March. It has raised its benchmark policy rate twice in the past two months, including an oversized 50 basis point move in mid-April, bringing the policy rate to 1 per cent.

Mr. Macklem reiterated on Wednesday that the bank will likely consider another 50 basis point rate hike for its upcoming meeting on June 1. It usually moves in quarter-point increments.

The bank’s campaign to normalize borrowing costs after two years of ultra-accommodative monetary policy still has a ways to go. Mr. Macklem has said several times in recent weeks that the bank intends to bring the overnight rate back to between 2 and 3 per cent relatively quickly. How fast and how high interest rates move will ultimately depend on how the economy reacts.

The big challenge for the central bank is cooling the Canadian economy enough to bring demand in line with the country’s supply without causing a recession. Mr. Macklem acknowledged the risk, but noted that the bank is forecasting relatively strong growth of 4.2 per cent this year and 3.2 per cent next year.

“I have no doubt, things aren’t going to play out exactly the way we forecast, they never do. But there’s quite a bit of room with that amount of solid growth… Even if growth was a bit weaker, it’s a long way from negative,” he said.

Borrowing costs for Canadian households have already begun moving higher, with variable rate mortgages moving in lockstep with the bank’s policy rate, and fixed-rate mortgages – which track government bonds – moving higher as bond investors have begun pricing in a more aggressive rate hike path from the central bank.

The elevated level of household debt in Canada could limit how aggressive the bank can be in increasing borrowing costs. Canadian households took on another $187.5-billion in mortgage debt last year, and $118.9-billion in 2020, which is well above prepandemic levels. That brought the ratio of household debt to disposable income to a record high by the end of 2021.

Royal Bank of Canada economists estimate that if the Bank of Canada’s benchmark overnight rate returns to 2 per cent, the average Canadian household debt payment will increase by around $2,000 next year.

Mr. Macklem said he is hopeful that the rate of inflation will start to decline later this year as global commodity price growth levels off and higher interest rates begin cooling the domestic economy. But he acknowledged that the outlook for inflation remains opaque.

“Where’s the war [in Ukraine] going to go? How is COVID going to play out in China? These are fundamental uncertainties,” he said.

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