Traders placed bets on a 75-basis-point rate hike from the Bank of Canada after Governor Tiff Macklem acknowledged the potential for rapid increases to borrowing costs to curb inflation that’s at a three-decade high.

Macklem and his officials delivered the first 50-basis-point increase in interest rates among Group of Seven nations last week. Asked Thursday evening about the possibility of moving by more than that amount at a future decision, Macklem said he was “not going to rule anything out.” 

Trading in overnight rate swaps shifted in response and has now priced in about a two-thirds chance of a 75-basis-point move at the bank’s June 1 decision. Such a move would bring Canada’s policy interest rate to 1.75 per cent, where it was before the COVID-19 pandemic hit. 

Benchmark two-year Canada yields rose as high as 2.724 per cent on Friday, the highest since October 2008. 

Macklem’s comment also prompted Desjardins Securities Inc. to change its forecast for the central bank’s June 1 meeting. The firm now sees a three-quarter-percentage-point increase instead of a half-percentage point previously. Annual consumer price gains in March hit 6.7 per cent, well above expectations.   

Speaking from Washington, where he was attending meetings of the International Monetary Fund and World Bank, Macklem reiterated that monetary policy needs to normalize reasonably quickly to keep inflation expectations moored around the bank’s 2 per cent target. 

“We’re prepared to be as forceful as needed and I’m really going to let those words speak for themselves,” he said.

A 75-basis-point move hasn’t happened in Canada since the late 1990s. But central bankers around the world, including the Federal Reserve, are signaling that faster and larger increases to interest rates are necessary to quell price pressures. 

Chairman Jerome Powell outlined an aggressive approach at the U.S. central bank earlier Thursday, potentially endorsing two or more half 50-basis-point increases starting at the next meeting in May. A regional Fed president signaled Monday that a 75-basis-point hike is also a potential option. 

Investors are now betting on four half-point hikes from the Fed in May, June, July and September. In Canada, expectations for a second 50-basis-point hike were cemented Wednesday, after Statistics Canada reported that inflation hit its highest level since 1991.  

Before Macklem’s comments Thursday, markets were pricing in about a one-third chance of a 75-basis-point move in June. 

Delivering that much of a tightening jolt would still leave borrowing costs below what the Bank of Canada considers a normal, or non-stimulative level, of between 2 per cent and 3 per cent.

The Bank of Canada governor reiterated that policy normalization doesn’t mean officials are on autopilot. On potential hiking paths, Macklem said a pause is possible as rates gets closer to neutral if higher borrowing costs “begin to bite” and demand slows quickly. 

In his meetings with global colleagues this week in Washington, Macklem said he’s seeing a “real determination” to lower inflation.

“We think there’s a real sense that central bankers, they need to deliver on their mandates,” Macklem said. “Getting inflation back to our targets is what we need to do to deliver our mandate and ensure that the confidence people have that we will control inflation is in fact realized.”