Bank of Canada says inflation to dictate rate moves, not housing prices

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) -Hot inflation is the Bank of Canada's primary focus as it raises interest rates, a senior central bank official told Reuters on Thursday, making it clear that the bank was willing to accept a housing market correction in order to curb consumer price gains.

Senior Deputy Governor Carolyn Rogers, in an interview with Reuters, said higher interest rates will weigh on housing and highly-indepted Canadians, but are needed to curb inflation, which is running at a 31-year high of 6.8%.

The Bank of Canada last week raised its policy rate to 1.5% from 1.0%, its second consecutive 50-basis point increase, and said it was ready to act "more forcefully" if needed. With borrowing costs rising, home sales have dropped sharply in recent months and prices have come off peak levels.

"Of course we look at this, but we look at more than housing," said Rogers. "And at the end of the day, the really important thing to remember is our target is inflation ... so that's our primary focus when we're making our decisions."

The Bank said earlier the housing market had been unsustainably strong and a moderation would be healthy.

Rogers made clear the central bank is also keeping an eye on the small but growing number of Canadians who are heavily indebted after stretching to buy homes at elevated prices. A correction could restrict their access to credit and dampen consumer spending.

"We know very well that they're the folks who will be most affected by interest rate increases. It's something we're going to watch closely," she said. "But all Canadians are affected by high inflation and that's our mandate."

Despite those higher prices, consumer spending is strong, said Rogers. "There's a lot of pent up demand, to travel, to spend, to get together. And that's having an effect on demand in the economy generally," she said.

Earlier, Bank of Canada Governor Tiff Macklem said inflation would dictate how fast interest rates go up, reiterating that the bank might need to make more increases in a row or consider a larger than 50-bp move.

Money markets see a 40% chance the bank will hike by 75-bp at its next decision on July 13, with rates expected to hit 3.25% by year-end, a level not seen since 2008.

Macklem said higher rates were needed bring domestic demand more in line with supply, though the bank was aiming to avoid overcooling the economy.

"We don't want to choke off demand. We want to get rid of the excess demand, the excess part of it," he said.

The Canadian dollar was trading 1.1% lower at 1.2695 to the greenback, or 78.77 U.S. cents, after touching its weakest since May 30 at 1.2698.

(Reporting by Julie Gordon and David Ljunggren in Ottawa, additional reporting by Fergal Smith; Editing by Toby Chopra, David Gregorio and Marguerita Choy)