Key insights
- Bank of Canada Governor Macklem signals tolerance for a short-term rise in inflation and near-term inflation expectations, driven by geopolitical events and rising oil prices. However, he expresses concern if longer-term inflation expectations remain elevated. This stance suggests a potentially less aggressive tightening path than some market participants anticipate, which could indirectly influence US equities through cross-border capital flows and relative monetary policy stances.
(Corrects paragraph 9 to remove quotes)
By Promit Mukherjee
OTTAWA, April 17 (Reuters) - Bank of Canada Governor Tiff Macklem said on Friday inflation will rise in the short term and that an uptick in near-term inflation expectations would not worry the central bank.
However, he said he would be concerned if longer-term inflation expectations remained elevated.
Macklem was speaking to journalists on a call from Washington on the sidelines of the IMF meetings.
“It’s certainly going to go up,” Macklem said of March inflation data due on Monday.
“We are not surprised, and we are not even that worried if we see near-term inflation expectations go up,” he said.
Money markets have swung between pricing in a 25 basis point interest rate hike and a 75 basis point increase this year as the war in Iran has raised concerns over oil and natural gas supplies and fuelled inflation.
The knock-on effects of higher oil prices are already visible at the pump, and food prices are also expected to rise, according to economists.
Macklem did not say whether the central bank would continue to hold rates this year, but said that after inflation surged above 8% four years ago, people had become more sensitive to price pressures and expectations could shift faster.
If people don’t expect inflation to return to 2% after a spike soon enough, that would be a concern, he said.
The Bank of Canada will publish its Business Outlook Survey on Monday, which will provide insights into business inflation expectations.
Short-term expectations refer to a one-year horizon, while medium- to long-term expectations span three to five years.
Separately, Macklem said new large language models, including Anthropic’s latest model Mythos, could expose and exploit vulnerabilities more quickly.
“That really puts a premium on having a mature cybersecurity posture,” he said, adding that governments at various levels were engaging with the U.S. administration and discussions would continue.
The BoC will be announcing its next rates decision on April 29.