Bank of Korea Governor: "Base interest rate may rise by 0.5 percentage points again in June"

by Park Pyunghee

Published 26 Apr.2022 11:37(KST)

Tiff Macklem, Governor of the Bank of Canada [Photo by Reuters]

[Asia Economy Reporter Park Byung-hee] Tiff Macklem, Governor of the Bank of Canada (BOC), stated that the central bank may raise the benchmark interest rate by an additional 0.5 percentage points at the monetary policy meeting on June 1.

According to the Wall Street Journal (WSJ) on the 25th (local time), Governor Macklem said during his testimony to Congress that the benchmark interest rate could be raised aggressively to curb inflation. He emphasized the need for a strong response, noting that the war in Ukraine could further fuel already high inflation.

The BOC raised the benchmark interest rate from 0.5% to 1% at the monetary policy meeting on the 13th. This was the first time in 22 years since May 2000 that the BOC raised the benchmark interest rate by 0.5 percentage points at once.

Canada's consumer price inflation rate surged from 5.7% in February to 6.7% in March. The March inflation rate was the highest since January 1991, when it recorded 6.9%.

Governor Macklem said, "I want to make it clear that Canadians should expect further rate hikes," adding, "I think we need to consider another 0.5 percentage point increase."

He also left room for a 0.75 percentage point hike. Governor Macklem said, "An increase of more than 0.5 percentage points is very unusual," but added, "I will not rule it out."

In the United States, James Bullard, President of the Federal Reserve Bank of St. Louis, recently said that a 0.75 percentage point increase should be considered if necessary.

The BOC also announced at the monetary policy meeting on the 13th that it would begin quantitative tightening (QT) to reduce the size of its asset holdings.

The BOC's asset holdings were 77 billion Canadian dollars before the COVID-19 pandemic but have now exceeded 400 billion Canadian dollars. The BOC plans to reduce its asset holdings by 40% over the next two years by stopping bond purchases and not reinvesting the proceeds from maturing bonds.

In the economic outlook released this month, the BOC forecasted economic growth rates of 4.25% this year and 3.25% next year.

Governor Macklem said that the Canadian economy is currently in a state where demand exceeds supply, and high interest rates are necessary to balance demand and supply.

He said that after quickly raising the benchmark interest rate to a neutral rate level, the BOC will pause rate hikes to observe the impact of the higher rates on demand. The neutral rate refers to an interest rate level that neither stimulates nor restrains the economy. The BOC currently estimates the neutral rate to be around 2-3%.