Bank of Canada official said household finances are in good shape and that monetary policymakers are prepared to aggressively tackle inflation. Canada’s 10-year yield rose to the highest since 2018.
Governor Sharon Kozicki acknowledged that while rising borrowing costs impact Canadians differently, higher price pressures are especially painful for low income individuals.
She also reiterated that the central bank is committed to bring back inflation to its 2% target and their willingness to take more aggressive actions including shrinking holdings of government bonds, known as quantitative tightening.
Governor Kozicki warned that Russia’s war in Ukraine is driving inflation higher than expected in the bank’s most recent quarterly forecasts, which will have to open the dialogue in the following meetings for higher interest rates to control it.
Before the speech, the expectation was to see nine 25 basis-point hikes during next year but the information provided increased the chances for a bigger move in the following month, shortening the awaited strengthening of the Canadian Dollar.
The comments during the speech helped strengthen the Canadian dollar, which rose above C$1.25 per U.S. dollar for the first time since January.
They also accelerated the bond sell-off: the benchmark Canada 10-year yield rose as high as 2.536%, up about 14 basis points.
With several policymakers at the U.S. central bank saying a 50-point hike is on the table.
Canada’s yield surge mirrored moves in the Treasury market.
Canada’s Inflation hit 5.7% which is the highest in 30 years. Kozicki mentioned the bank’s concerns about inflation expectations drifting upward given the persistently high price gains, but her speech shows the Bank of Canada is prepared to act swiftly and strongly to diminish inflationary pressures.
Kozicki said that while debt risks persist, the bank judges that compared to the start of the 2017–18 tightening cycle, households on average appear to be in better financial shape now. Her remarks emphasized that differences in households’ wealth, debt and incomes can amplify economic shocks and impact decisions about fiscal and monetary responses.
A strong labor market and substantial savings accumulated during the pandemic have cushioned Canadian household balance sheets, but Kozicki said high levels of indebtedness remain an important domestic vulnerability.