Is that a threat?

Speaking at the IMF/IBRD/G7/G20 gabfest in Washington DC on Thursday, Bank of Canada Governor Tiff Macklem appeared to suggest that the Bank might choose to raise rates in even larger steps than the 50 basis point hike it implemented earlier this month. Somewhat unusually, there is no official transcript of Macklem's remarks on the Bank's own website, but it's probably safe to assume that the comments recalled by Scotiabank economist Derek Holt are a pretty accurate summary:

Scotiabank economist Derek Holt quoted Macklem as saying he was "not going to rule anything out" in terms of the size of any rate hike. "We're prepared to be as forceful as needed and I'm really going to let those words speak for themselves," Macklem reportedly said.

Macklem also said ongoing supply chain disruptions, the war in Ukraine and spike in COVID-19 cases in China will likely make high inflation linger for longer than anticipated. Earlier this month, the bank said it doesn't expect inflation to get back into the range of between one and three per cent that its targets until the latter half of next year."

He also reiterated how a pause would only be entertained once the policy rate was in the neutral rate range," Holt said, referring to the level where interest rates reach a Goldilocks level where they are neither stimulating the economy, nor holding it back. Most economists think that so called "neutral range" is a bank rate of somewhere between two and three per cent, well above its current level.

This is consistent with the hawkish tone of the Bank's recent rate decision, but arguably goes a little further in making the threat of larger rate hikes more explicit. It is becoming ever clearer that the Bank recognizes it erred in not starting its tightening cycle sooner; Macklem is now trying to reassure markets that it will not let itself fall any further behind the curve. For now, the best guess is that the Bank will continue with the 50 basis point hikes pro tem, but any more of this hawkish rhetoric and those expectations will have to be revised upwards.