Bank of Canada Governor Tiff Macklem at a news conference on July 12, 2023.DAVE CHAN/AFP/Getty Images
Bank of Canada Governor Tiff Macklem said the central bank’s 2-per-cent inflation target “is now in sight” and that interest rates “may be sufficiently restrictive,” but warned that his team could raise rates again if consumer price growth remains stubborn.
Mr. Macklem was speaking the day after the central bank held its key interest rate steady at 5 per cent, hitting pause on monetary policy tightening after two rate hikes over the summer.
“With past interest rate increases still working their way through the economy, monetary policy may be sufficiently restrictive to restore price stability,” he told the Calgary Chamber of Commerce on Thursday.
“However, Governing Council is concerned about the persistence of underlying inflation. Inflation is still too high, and there is little downward momentum in underlying inflation.”
The Bank of Canada has raised interest rates 10 times over the past year-and-a-half, making it far more expensive for households and businesses to borrow money and service their debt. The goal of this is to slow down spending and investment throughout the economy, give supply time to catch up with demand, and reduce upward pressure on prices.
Earlier in the summer, the bank resumed rate hikes after a five-month pause, because it didn’t think the economy was slowing fast enough to bring down inflation. But a string of weaker-than-expected data over the past month has changed that calculus.
Opinion: The Bank of Canada looks determined to undersell its shift in policy direction
Gross domestic product data, published last week, showed the Canadian economy contracted in the second quarter, led by a slowdown in consumer spending and a drop in home construction, alongside the impact of wildfires. Meanwhile, the unemployment rate has risen half a percentage point over the past three months and job vacancies are down sharply compared to a year ago.
“The data since mid-July are providing clearer evidence that higher interest rates are moderating spending and rebalancing demand and supply in the economy,” Mr. Macklem said.
That doesn’t mean the central bank is ruling out further rate hikes altogether. As the bank did in its rate announcement statement on Wednesday, Mr. Macklem struck a hawkish tone when talking about inflation.
Annual consumer price index (CPI) growth has fallen from a four-decade high of 8.1 per cent last summer to 3.3 per cent in July. But core inflation measures, which strip out volatile price movements, remain stuck at about 3.5 per cent. Oil prices have increased over the past month, which will likely push up headline inflation over the next few months, Mr. Macklem said.
The central bank’s latest economic forecast, from July, sees inflation running at around 3 per cent for the next year, and only falling to the 2-per-cent target by the middle of 2025. The bank will publish a new inflation forecast alongside its rate decision on Oct. 25.
“If we need to raise interest rates further to restore price stability, we are prepared to take further action. But we don’t want to raise our policy rate more than we have to,” Mr. Macklem said, noting at another point in the speech that “we are not trying to kill economic growth.”
Most Bay Street analysts and bond traders are betting that the central bank is now done with interest rate increases, although they don’t expect it to start cutting rates any time soon.
“While the Governor spent time lamenting the fact that inflation is not falling as fast as officials had previously expected, it seems like he’s content to give interest rate hikes some more time to work,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients about the speech. “We’re obviously going to stick with our call that the central bank is done raising rates for this cycle.”
The Bank of Canada has come under increasing political pressure as borrowing costs have marched higher. Ahead of Wednesday’s rate announcement, several provincial premiers sent letters to the bank begging it to hold off on further rate increases.
After the rate announcement, Finance Minister Chrystia Freeland praised the decision to stand pat as a “welcome relief for Canadians” – a rare comment on monetary policy from a federal minister, which some economists criticized as a breach of the norms of central bank independence.
When asked about the political commentary, Mr. Macklem said he was “confident that the Bank of Canada remains independent.”
In his speech, he addressed two issues that have become increasingly common in political conversations about the central bank: Whether the bank should exclude mortgage interest costs when assessing inflation, and whether it should abandon its 2-per-cent inflation target in favour of a higher target.
Mortgage payments have risen sharply alongside the Bank of Canada’s aggressive rate hikes over the past 18 months. July’s CPI data showed mortgage costs were up about 30 per cent, compared with the previous year, making it the single biggest contributor to the annual inflation rate. This has led some economists and politicians to argue that the bank itself is the main driver of inflation, and that inflation, in fact, is lower than central bankers are suggesting.
“It’s true that if we hadn’t raised interest rates, mortgage costs might be lower today, but inflation throughout the economy would be a much bigger problem for everyone,” Mr. Macklem said.
On the question of whether the Bank of Canada should abandon its 2-per-cent inflation target, Mr. Macklem was unequivocal: “You don’t raise the target just because you missed it,” he said.