RBC’s McKay is calling for “quick action” on rates to curb inflation

RBC's McKay is calling for "quick action" on rates to curb inflation

Royal Bank of Canada Chief Executive Officer David McKay said the country’s central bank needs to take “rapid activity” with numerous interest rate increments to bring inflation under control. Talking in a meeting with Bloomberg News on Tuesday, McKay said he doesn’t think the new speed increase of expansion was transitory. He sees a few indications of a wage-price cycle taking root that has effectively pushed up costs for all time.

McKay’s comments illustrate the extent to which inflation — along with labor shortages, rising wages and housing affordability — has become a top area of concern for the nation’s executives. Canada’s inflation rate has been hovering near 5 per cent in recent months, levels not seen since 2003.

“We’ve never really gone back as a society and reduced wages because inflation was temporary,” McKay, 58, said. “This is permanent, sustained inflation that has to be dealt with through monetary policy, and therefore we need rapid action this spring as a series of rate increases to address it.”

Markets are pricing in at least five Bank of Canada rate hikes this year, beginning as early as Jan. 26, when policy makers will unveil their first rate decision of 2022. Central bank officials have indicated they’re poised to begin raising rates early this year to quell the price pressures after keeping the key policy interest rate at a historic low of 0.25 per cent since March 2020.

Support for higher rates is all the more significant given the nation’s households are among the most indebted anywhere, and will be squeezed by the rising borrowing costs — a concern that McKay also highlighted during the interview.

Commercial banks charge their best customers just over 2 percentage points above that policy rate.

But the banker warned against blaming the nation’s soaring housing costs on its high levels of immigration, given the need for new sources of labor.

“We better figure out a way to accommodate” the population growth, said McKay, whose bank is Canada’s largest by market value. “Because if we don’t figure out a way to accommodate it through housing stock, then it could be the opposite: that we don’t attract immigrants because the cost of living and the quality of life isn’t there. That would be the worst outcome at the end of the day, that people chose to go to other markets because of quality of life.”

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