Bank of Canada says higher rates are starting to work, frets over inflation risk

OTTAWA, Dec 12 (Reuters) – The Bank of Canada’s rapid-fire rate hikes are starting to slow the economy, the governor said on Monday, but while the bank wants to avoid a recession, there is a risk sticky inflation will require “much higher” rates.

Speaking to business leaders in Vancouver, Governor Tiff Macklem said the tightening had “begun to work” but would take time to feed through the economy.

The bank lifted rates at a record pace of 400 basis points in nine months to 4.25% – a level last seen in January 2008 – to tame inflation that was 6.9% in October. That is more than three times the central bank’s 2% target.

Going forward, the challenge is that raising rates too much would risk driving the economy “into an unnecessarily painful recession”, he said. Not raising them enough would allow price increases to remain elevated and feed expectations for persistently high – or sticky – inflation.

“With inflation running well above target, this is the greater risk,” Macklem said. “If high inflation sticks, much higher interest rates will be required to restore price stability, and the economy will have to slow even more sharply.”

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