Bank Of Canada Will Act Aggressively To Tackle Inflation, Macklem Says

The Bank of Canada said on Thursday it would act "with determination" to rein in soaring prices, saying a failure to act decisively would make it much more painful to bring inflation back to target.

Bank of Canada Governor Tiff Macklem, speaking to a business audience, also said the central bank did not intend to actively sell bonds when it embarks on its first-ever quantitative tightening program, instead allowing holdings to roll off as they mature.

Inflation in Canada hit a 30-year high of 5.1% in January and price pressures are broadening, making buying necessities like gas and groceries more expensive. Despite this development, inflation expectations remain well-anchored, Macklem said.

"Canadians can expect us to use our tools with determination to keep them that way," he told the CFA Society Toronto in a webcast. "The lesson from history is that if inflation expectations become unmoored, it becomes much more costly to get inflation back to target."

The Bank of Canada on Wednesday hiked its key interest rate to 0.5% from 0.25%, its first increase since October 2018, launching a tightening cycle to tackle inflation.

The central bank made clear that the control of interest rates remained its primary monetary policy tool, to be complimented by quantitative tightening. It did not give a timeframe for starting QT, saying only that it "would be a natural next step" following Wednesday's rate increase.

"When we initiate QT, we will stop purchasing Government of Canada bonds. From that point forward, maturing government bonds will not be replaced when they roll of the balance sheet," he said. "We do not intend to actively sell bonds."

In the current reinvestment phase, the Bank of Canada buys roughly C$1 billion worth of government bonds each week to keep the size of its balance sheet constant.

The Canadian dollar was trading 0.3% lower at 1.2670 to the greenback, or 78.93 U.S. cents, around midday.