Bank of Canada says stronger US dollar could mean higher interest rates

The strong US dollar, which has made imports and travel more expensive for Canadians, could mean the Bank of Canada will have to "work harder" on interest rates, Governor Tiff Macklem said on Friday, hinting at further increases.

Speaking after the International Monetary Fund and World Bank meetings in Washington, Macklem said there was broad consensus at the annual meeting that hot inflation remains the most pressing threat to current and future prosperity. "Over the last six weeks, two months or more, we've seen the US dollar move higher. The Canadian dollar has not kept pace," Macklem told reporters. "Certainly if this situation continues... it will mean that, other things being equal, we will have to work more on interest rates. We'll be watching that closely," Macklem said. The Canadian dollar has lost 8.5% against the US dollar since August as aggressive rate hikes by the US Federal Reserve and volatility in financial markets triggered gains in the safe-haven greenback. Macklem also reiterated that interest rates need to rise further, saying how much and for how long will depend on both domestic and external pressures driving rapid price increases and longer-term inflation expectations. The Bank of Canada has raised its policy rate by 300 basis points since March, one of the steepest and fastest tightening cycles ever. Money markets are favoring a 50 basis point hike on October 26, but bets on a larger 75 basis point hike have also increased. Inflation fell to 7.0% in August and analysts polled by Reuters expect a further decline to 6.8% when September data is published next week. At the same time, underlying price pressures have proven sticky. Macklem said the central bank would monitor the data closely, but inflation would remain well above the 2% target even if it fell further. "What won't change in two weeks is that the economy will still clearly have excess demand, we will still have a very tight labor market and inflation. I would like to see some good improvements but it will still be too high," Macklem said. Follow Global Economic Developments on Social Media! Click here to follow Ieconomy official Facebook account! Click here to follow Ieconomy official Instagram account! Click here to follow Ieconomy official Twitter account!