OTTAWA (Reuters) -Canada’s economy is overheating, creating domestic inflationary pressures, and higher interest rates are needed to cool things down, the head of the Bank of Canada said on Wednesday.
Governor Tiff Macklem, testifying to a Senate committee, said interest rates may need to go above the neutral rate range – currently estimated to be between 2% and 3% – for a period of time to get inflation back to target.
“If you boil it down, the economy is overheating. That’s creating domestic inflationary pressures. We need to cool growth, to cool inflation,” Macklem said.
“It’s going to be delicate,” he added. “But we do need to raise interest rates to moderate that spending growth and get inflation back to target.”
The Bank of Canada increased interest rates by a rare 50 basis points earlier this month, and Macklem has signaled that the central bank will likely consider a second oversized hike at its next meeting, on June 1.
How high rates go will depend on how the economy responds to increases and on the inflation outlook, Macklem reiterated.
“It’s possible that we may have to go above the neutral rate for a period of time to return inflation to target, but it’s a bit above 2 or 3%, it’s not 7% or 8%,” he said, when pressed on whether rates could return to levels seen decades ago.
“That reflects the fact that inflation expectations are well anchored,” he added.
Canada’s inflation rate hit a 31-year high of 6.7% in March.
(Reporting by Julie Gordon in OttawaEditing by Chris Reese and Leslie Adler)