Macklem says global financial stress could change Canada’s exchange rate path

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(Bloomberg) — Governor of the Bank of Canada Tiff Macklem acknowledged that further tightening of financial conditions due to global banking tensions could alter the future course of domestic interest rates.

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In a speech to the Toronto Area Trade Council, Canada’s central banker reiterated on Thursday that policymakers are ready to raise interest rates further and noted that although the risks to global financial stability appear to have been “contained”, but a more severe outbreak would help achieve the “more complex” 2% inflation target.

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“If financial stress leads to tighter than expected tightening, and if this persists, then we need to take this into consideration when setting policy rates to achieve our inflation target, ” said Macklem, according to his prepared text. comment.

The comments show that policymakers are increasingly aware of the need to consider recent global financial system stress as the Bank of Canada sets monetary policy in the coming months.

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“If we start to see signs that inflation is likely to be above our 2% target, we are ready to raise rates further,” he said, adding that the Bank remains focused on job and wage growth, service inflation, and corporate valuation. behavior and inflation expectations.

However, Macklem said in the speech that the central bank has separate tools to deal with price stability and financial stability independently.

He noted that re-emerging financial stress is “more pervasive” which could lead to a “more substantial” spillover effect on Canada. While the governor said financial stress could “hit quickly,” he said the central bank was ready with “a range of tools” to provide liquidity in the event of a crisis.

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First Republic Bank was seized by the US government and sold to JP Morgan Chase earlier this week, which Macklem pointed out in his discussion. The acquisition comes ahead of the failure of Silicon Valley Bank and Signature Bank in the United States, as well as the government-brokered takeover of Swiss giant Credit Suisse by rival UBS. Regional banking stocks continued to sell off, including First Horizon Corp., which was taken over by the Bank of Toronto Dominion early Thursday.

Banking tensions have prompted traders in the overnight swaps market to bet on the Bank of Canada to lower interest rates later this year, with the full 25 basis point drop priced in in September. 12. In recent exchanges, Macklem poured cold water on that, saying it was too early to discuss any easing of monetary policy.

Officials left the overnight rate unchanged at 4.5% at the last two meetings of the Board of Governors. The Bank of Canada’s next decision is June 7, with most economists expecting another hold.