Bank of Canada Governor says remaining vigilant still necessary
In a speech at the annual conference of the International Monetary Fund in Washington on Thursday, Bank of Canada Governor Tiff Macklem said that the banking crisis in the US and Europe has had minimal impact on Canada's financial system so far, but that system vulnerabilities must be continuously monitored.
"You're seeing a little bit of spillover to Canada, but honestly, it's really been quite muted," Macklem said when asked about how the country's financial system had been affected. "And I do think we do need to be vigilant."
Macklem echoed remarks made by Deputy Governor Toni Gravelle last month when she indicated the bank is ready to intervene and offer liquidity if the domestic banking sector were to experience stress. Central bankers are being prompted to closely examine the possibility that financial stress might cause a financial squeeze by the bankruptcy of American lenders Silicon Valley Bank and Signature Bank and the subsequent rescue by Credit Suisse.
"The Bank's mandate to promote the stability of the financial system means that we're ready to act in the event of severe market-wide stress and provide liquidity support to the financial system," Gravelle said in a Reuters report.
The Bank of Canada (BoC) kept its benchmark overnight rate unchanged on Wednesday at 4.50%. At its most recent two policy sessions, the BoC maintained rates steady after increasing rates eight times in a row through January. It was the first significant central bank in the whole world to halt its tightening program.
On Wednesday, the bank rebuffed market expectations for a rate decrease this year and said there was less of a chance of a recession.
"Our economy remains in excess demand and labor markets are still tight. Unemployment is still very close to a record low," Macklem said on Thursday. "We can see past interest rate increases working their way through the economy, shrinking demand."
The economy and employment situation in Canada have outperformed expectations, but markets still expect cuts of more than 50 basis points. The Canadian economy surprised analysts by adding 21,800 new jobs in February, putting pressure on the central bank to reconsider hiking rates after it had previously said it intended to end its year-long tightening campaign.
A Reuters survey found that over the course of the upcoming year, the Canadian dollar is anticipated to strengthen due to expectations that the export-driven economy will avoid a hard landing and that the U.S. dollar will weaken as the rate disparity with its peers narrows.
"If momentum continues to remain strong, that could be something that pushes the BoC towards tightening again later this year," Robert Both, macro strategist at TD Securities, said. "The current level of inflation and signs of a rebound in Q1 GDP growth are something that are going to make it very difficult for the BoC to cut in the near term."
