By Julie Gordon and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada is prepared to act "forcefully" with rate hikes to return inflation to target, particularly as price pressures broaden amid tight labor markets and booming demand, a deputy governor said on Friday.
Sharon Kozicki, in her first speech since joining governing council last year, also said the pace and magnitude of interest rate increases, along with the start of quantitative tightening, would be actively discussed at the central bank's April meeting.
"Inflation in Canada is too high, labor markets are tight and there is considerable momentum in demand," Kozicki said, speaking via webcast to the Federal Reserve Bank of San Francisco.
"It's important to be clear that returning inflation to the 2% target is our primary focus and unwavering commitment. We have taken action and will continue to do so to return inflation to target, and we are prepared to act forcefully," she said.
Kozicki's words echoed statements by Governor Tiff Macklem earlier this month, who said the bank could act aggressively to tackle spiking prices and did not rule out a 50 basis point hike.
The Bank of Canada lifted its policy rate to 0.5% earlier this month, up from 0.25% and its first increase in three years. Inflation, meanwhile, hit 5.7% in Canada in February and is expected to go higher.
Kozicki said that while high household indebtedness, particularly mortgage debt, is a key risk, Canadians appear to be in better financial shape than at the start of the BoC's last tightening campaign in 2017/18.
That suggests a more aggressive path this time around, said economists.
"That's the central bank's way of signaling that it thinks rates will need to rise higher this time around than the 1.75% peak policy rate seen during the previous cycle," said Royce Mendes, head of macro strategy at Desjardins Groups, in a note.
He said the repeated use of the word "forcefully" suggests a 50-basis-point move is being considered in April.
Money markets, for their part, are betting the Bank of Canada will raise rates by a further 200 basis points this year. [BOCWATCH]
Economists generally view that as too aggressive, considering Canada's highly indebted households and the sharp impact aggressive tightening could have on the country's frothy housing market. Kozicki said the central bank will "watch developments with respect to households closely as we proceed."
"High indebtedness could amplify the impact of rising interest rates, and it could also worsen the impact of a future shock," she said.
The Canadian dollar was trading 0.4% higher at 1.2482 to the greenback, or 80.12 U.S. cents, its strongest level since Jan. 20.