Governor Tiff Macklem acknowledged that a further tightening of financial conditions due to global banking stresses could alter the future path of Bank of Canada interest rates.

In a speech to the Toronto Region Board of Trade, Canada’s chief central banker reiterated Thursday that policymakers are prepared to hike again and noted that although global financial stability risks seem “contained,” a more severe flare-up would make achieving the 2 per cent inflation target “more complicated.”

“If financial stress were to lead to more tightening than expected and if this were to persist, we would need to take this into consideration as we set the policy rate to achieve our inflation target,” Macklem said.

The loonie extended its rally after the speech, trading as high as $1.3519 per U.S. dollar before giving up some of those gains.

The comments suggest recent financial system stress is likely to be weighed more carefully as the Bank of Canada sets monetary policy in coming months, especially if accompanied by a deteriorating global outlook.

Still, Macklem’s comments centered on getting inflation back under control, which he said will “take time,” reiterating that getting consumer price pressures from 3 per cent to a 2 per cent yearly pace is “slower and more uncertain.”

In a question and answer session after the speech, Macklem stressed he think it’s “too early to really be thinking about interest rate cuts” and noted that policymakers are still more worried about upside risks.

“If we start to see signs that inflation is likely to get stuck materially above our 2 per cent target, we are prepared to raise rates further," he said in the speech, adding that the Bank remains focused on employment growth and wages, service inflation, corporate pricing behavior and inflation expectations.

Still, Macklem said the central bank has separate tools to deal with price stability and financial stability independently.

He noted that a “more pervasive” reemergence of financial stress could lead to “more significant” spillover effects into Canada. While the Governor said financial stresses can “strike quickly,” he said again that the central bank is ready with a “range of tools” to provide liquidity in the event of a crisis.

First Republic Bank was seized by the U.S. government and sold to JPMorgan Chase earlier this week, which Macklem flagged in his discussion. The sale was preceded by the failure of Silicon Valley Bank and Signature Bank in the U.S., as well as the government-brokered takeover of Swiss giant Credit Suisse by rival UBS.

Regional bank stocks continued to sell off, including First Horizon, whose takeover was abandoned by Toronto-Dominion Bank earlier Thursday.

The banking stresses have prompted traders in overnight swaps markets to place bets on the Bank of Canada lowering rates by the end of this year, with a full 25-basis point cut priced by December. In recent communications, Macklem has poured cold water on that, saying it’s too early to be discussing any loosening of monetary policy.

Officials have kept the policy rate unchanged at 4.5 per cent at the last two meetings of the Governing Council. The Bank of Canada’s next decision is June 7, with most economists expecting another hold.