Bank of Canada says "considerable space" left to hike, 50 bps move possible

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) - The Bank of Canada has "considerable space" left to raise interest rates this year, Governor Tiff Macklem said on Thursday, and did not rule out a rare 50-basis-point move if needed to rein in hot inflation.

The central bank, increasingly concerned about spiking prices, hiked rates for the first time in more than three years on Wednesday and said it was prepared to act aggressively if need be to keep inflation expectations grounded.

"There is certainly considerable space to raise interest rates over the course of the year," Macklem said in a question and answer session after a speech to a business audience.

"If we have to move more quickly, we are prepared to do that," he added. "I am not going to rule out a 50-basis-point move in the future."

He did not elaborate when asked what conditions would merit such a hike.

The Bank of Canada last hiked by 50 basis points in May 2000. Inflation in Canada hit a 30-year high of 5.1% in January and price pressures are broadening, making buying necessities like gas and groceries more expensive.

Earlier, Macklem told the CFA Society of Toronto the bank would act "with determination" to rein in soaring prices, saying a failure to act decisively would make it much more painful to bring inflation back to target.

Even with food and gas prices rising quickly, inflation expectations remain well-anchored, Macklem said.

"Canadians can expect us to use our tools with determination to keep them that way," he said. "The lesson from history is that if inflation expectations become unmoored, it becomes much more costly to get inflation back to target."

The central bank made clear interest rates remained its primary monetary policy tool, to be complimented by its first-ever quantitative tightening program, a reference to the process of allowing the government bonds purchased during the pandemic to roll off its balance sheet.

Macklem said the central bank did not intend to actively sell bonds, nor did he give a timeframe for starting QT, saying only that it "would be a natural next step" following Wednesday's rate increase.

In the current reinvestment phase, the Bank of Canada buys roughly C$1 billion ($789 million) worth of government bonds each week to keep the size of its balance sheet constant.

The Canadian dollar was trading 0.4% lower at 1.2675 to the greenback, or 78.90 U.S. cents.

On Wednesday, the central bank raised its policy rate to 0.5% from a record low 0.25%, its first increase since October 2018.

($1 = 1.2672 Canadian dollars)

(Reporting by Julie Gordon and David Ljunggren in Ottawa, additional reporting by Fergal Smith in Toronto; Editing by Paul Simao, Jonathan Oatis, Kirsten Donovan)