Bank of Canada Governor Tiff Macklem said his central bank is “getting closer” to raising interest rates as slack in the economy dissipates, in line with the forward guidance officials have been providing all along.

While substantial monetary stimulus is still needed in order for the economy to fully recover, Macklem said his team remains focused on its inflation target at a time when risks associated with price pressures have increased.

“For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed,” Macklem wrote in an opinion piece for the Financial Times published Monday. “We are not there yet, but we are getting closer.”

The language in the article is consistent with recent efforts by the Bank of Canada policy makers to reassure Canadians they are serious about inflation, including a decision last month that saw officials bring forward the timeline for possible interest rate increases to early next year.

Supply disruptions lasting longer

That policy decision was more hawkish than expected and caught some market players by surprise, but Macklem said the move is in line with the central bank’s communications throughout the pandemic.

“As for our forward guidance on the policy interest rate, we were clear from the outset that it was based on an outcome,” the governor said.

Macklem reiterated that the Bank of Canada’s view is still that recent inflationary pressures will ease. Yet, he acknowledged there remains a high level of uncertainty. “Supply disruptions appear to be lasting longer than we thought, and energy price increases are adding to current inflation rates.”

He said the Bank of Canada will adjust policy if needed, depending on the inflationary pressures.

“While our analysis continues to indicate that these pressures will ease, we have taken them into account for the dynamics of supply and demand,” Macklem said. “What our resolve does mean is that if we end up being wrong about the persistence of inflationary pressures and how much slack remains in the economy, we will adjust.”

Bloomberg.com