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Bank of Canada says rates are too stimulative, may need to go above neutral

Friday, May 13, 2022
Bank of Canada says rates are too stimulative, may need to go above neutral © Reuters. FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo/File Photo

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) - The Bank of Canada's policy rate, at 1%, is "too stimulative" given soaring inflation and interest rates may need to go above neutral because parts of the economy have become less sensitive to increases, an official said on Thursday.

Deputy Governor Toni Gravelle, speaking to economists in Montreal, also said the central bank would likely revise up its near-term inflation projections, as the "perfect storm" of global and domestic price increases continue to persist.

"Our policy rate, at 1%, is too stimulative, especially when inflation is running significantly above the top of our control range," Gravelle said. "We need our policy rate to be at more neutral levels."

He said the Bank was moving quickly to get back to the neutral range - between 2% and 3% - and reiterated it was prepared "to be as forceful as needed" to cool demand.

The Bank of Canada made a rare 50 basis point increase last month and is widely expected to go ahead with another oversized increase at its June 1 decision. Money markets are betting the policy rate will be around 3% by year-end.

"We may also need to raise rates above neutral because parts of the economy may be less sensitive to rates hikes than in the past," Gravelle said, noting households have more savings and less non-mortgage debt than before the pandemic.

Demand for housing could also prove more persistent in the face of rate hikes than expected, he said.

Alternatively, the central bank could pause as it enters the neutral range if price increases reverse course or if the housing market slows more than expected.

"Our base-case scenario includes a slowdown in housing activity. But we could see a larger-than-expected slowdown due to higher indebtedness and unsustainably high housing prices," Gravelle said.

He reiterated the central bank is not on "autopilot" and does not have a specific "terminal" rate.

Inflation in Canada hit a 31-year high at 6.7% in March, its 12th consecutive month above the Bank of Canada's 1-3% control range and more than triple the 2% target.

The Canadian dollar was trading 0.3% lower at 1.3030 to the greenback, or 76.75 U.S. cents.

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22-05-2022 11:12:39 (UTC+7)

EUR/USD

1.0562

-0.0024 (-0.23%)

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↑ Buy

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EUR/USD

1.0562

-0.0024 (-0.23%)

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↑ Buy

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GBP/USD

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USD/JPY

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AUD/USD

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 EUR/USD1.0562↑ Buy
 GBP/USD1.2489Neutral
 USD/JPY127.86Neutral
 AUD/USD0.7039Sell
 USD/CAD1.2839↑ Buy
 EUR/JPY135.05Neutral
 EUR/CHF1.0296↑ Buy
 Gold1,845.10↑ Buy
 Silver21.765↑ Sell
 Copper4.3042↑ Buy
 Crude Oil WTI110.35↑ Sell
 Brent Oil112.91↑ Sell
 Natural Gas8.058↑ Sell
 US Coffee C216.48↑ Buy
 Euro Stoxx 503,657.03↑ Buy
 S&P 5003,901.36↑ Buy
 DAX13,981.91Buy
 FTSE 1007,389.98Neutral
 Hang Seng20,717.24↑ Sell
 Small Cap 20001,773.27↑ Buy
 IBEX 358,484.50Neutral
 BASF48.850Buy
 Bayer63.74Buy
 Allianz195.58Buy
 Adidas172.80Buy
 Lufthansa6.852↑ Sell
 Siemens AG115.08Neutral
 Deutsche Bank AG9.362Buy
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