(Adds comments from Rogers about excess demand, labor market)
By Steve Scherer and David Ljunggren
OTTAWA, March 9 (Reuters) - The Bank of Canada needs
more evidence to gauge if interest rates are high enough to tame
inflation, in part because the economies of major trading
partners are doing better than forecast, Senior Deputy Governor
Carolyn Rogers said on Thursday.
On Wednesday, the bank left its key overnight interest rate
on hold at 4.50%, becoming the first major central bank to
suspend a tightening campaign as inflation eases. Inflation
slowed to 5.9% in January, still far above the BoC's 2% target.
The BoC has said it will hold rates as long as inflation
drops as it forecast in January, hitting 3% at about mid-year.
Data since then have painted a "mixed picture," Rogers said.
"We'll still need more evidence to fully assess whether
monetary policy is restrictive enough to return inflation to
2%," Rogers said in a speech in Winnipeg to the Manitoba
Chambers of Commerce. "If evidence accumulates suggesting
inflation may not decline in line with our forecast, we're
prepared to do more."
Money markets are almost fully pricing in another rate hike
by September. Rogers later told reporters the bank still believed the
economy was dealing with excess demand, adding it would take
some time before balance was restored.
Part of the challenge is an "incredibly tight" labor market
at a time when productivity is slipping.
"(This) is a recipe for pressure on wages, which is what
we're worried about, because that will make it difficult to get
back to our 2% inflation target," she said.
The January jobs report was much stronger than forecast,
but gross domestic product stalled in the fourth quarter -
coming in far weaker than the 1.3% annualized growth forecast by
the BoC.
"It looks like the central bank's pause is on shaky ground
and it wouldn't take all that much additional evidence to spur
them back into action," said Royce Mendes, head of macro
strategy at Desjardins.
In her speech, Rogers noted economic growth and inflation
outlooks for both the United States and Europe were higher than
the BoC had expected in January.
"Since these are our main trading partners, this could point
to some further inflationary pressure in Canada," Rogers said.
Over the past year, the central bank raised rates eight
times in a row by a total of 425 basis points to tame inflation,
which peaked at an annualized rate of 8.1% last year.
The BoC expects near-zero growth for the first three
quarters of 2023.
The Canadian dollar was trading nearly unchanged
at 1.38 to the greenback, or 72.46 U.S. cents, holding near its
weakest in nearly five months.
Money markets expect the BoC's policy rate to peak at about
4.75% this year, or roughly 90 basis points below the expected
end point of the U.S. Federal Reserve.
(Reporting by Steve Scherer and David Ljunggren; additional
reporting by Fergal Smith in Toronto; Editing by Leslie Adler
and Deepa Babington)
