Governor of the Bank of Canada Tiff Macklem after speaking before the Canadian Club Toronto at the Royal York Hotel in Toronto on Dec. 15.Carlos Osorio/The Globe and Mail
Bank of Canada Governor Tiff Macklem knows he’s not well-loved by Canadians at the moment.
People who had never known the name of a central bank governor before are cursing his. Opposition politicians and provincial premiers rail against him.
He figures it comes with the job.
“At some moments in history, central bankers were all heroes; and other times, they’re all villains,” he said.
In his 3½ pressure-packed years as head of Canada’s central bank, Mr. Macklem has been both.
In 2020, when he first took on the job, he piloted a massive monetary policy effort launched by his predecessor, Stephen Poloz, that helped save the country from financial market collapse and economic ruin during the first year of the COVID-19 pandemic.
But over the past couple of years, he has become known as the man responsible for repeatedly raising interest rates, to fight a surge in inflation that the central bank initially fumbled badly. Now, with Canadians’ finances strained, their mortgage payments soaring and their economy stalling, Mr. Macklem is the Grinch who refuses to talk about cutting those rates.
“We have a job to do. And Canadians actually expect us to do our job. They don’t like high inflation, that comes through very clearly. Unfortunately, there’s no pain-free way, there’s no easy way to get back to price stability,” he said.
In a year-end interview with The Globe and Mail, Mr. Macklem defended the thankless job he and his colleagues did in 2023, and discussed the challenges ahead. He dug in his heels against his political critics who would like to tell him how to do his job.
And he talked hopefully about a 2024 when he may finally be able to ease out of the bad-guy role. If he can return inflation safely back to the bank’s two-per-cent target, without plunging the economy into a recession in the process, he might even look like a hero again.
“Next year will be a year of transition. The payoff is coming, and it’s getting closer,” he said.
At the beginning of 2023, things were looking up for Mr. Macklem and the Bank of Canada.
Inflation was on the way down. In late January, the bank signalled that it was prepared to pause raising interest rates, after a dizzying 10 months in which it had increased its policy rate from a paltry 0.25 per cent to an imposing 4.5 per cent. It followed through in March, becoming the first major central bank in the world to put an end to 2022′s rate-hiking cycle.
By mid-year, however, with the housing market reignited and inflation pressures rebuilding, Mr. Macklem and his colleagues made an about-face. The bank raised its policy rate by a quarter of a percentage point in June and again in July, lifting it to a two-decade high, and warned that it might not be done.
Although he had consistently referred to the March rate hold as a “pause” and said it was “conditional” on the signals from economic indicators, critics viewed Mr. Macklem’s stop-and-start rate policy as a misstep. Some felt that the bank mishandled communicating its message to the financial markets.
By September, the bank was back on the sidelines. Mr. Macklem and his team have held the policy rate steady at five per cent for three consecutive decisions, strengthening confidence that rates have finally peaked, that the central bank is done.
Former Bank of Canada governor David Dodge feels Mr. Macklem has been unfairly criticized by market participants, who didn’t listen to what the bank was actually saying as it probed for the top of an unusually complicated rate cycle.
“I don’t think stopping and starting was bad. It’s just that so much emphasis gets put on the stop and the start, as opposed to [the message of]: Yeah, we’re kind of feeling our way through to get to where we want to get to. I thought he had said pretty clearly that that’s what they were doing.”
Mr. Macklem continues to caution that the bank is willing to resume rate hikes if warranted. But once again, there seems to be some broken telephone between what the Bank of Canada is saying and what the financial markets are hearing. The bond market has decided that rates have peaked and the bank will start cutting them by April. (Most economists think the middle of the year is more likely.) Nothing Mr. Macklem says has swayed that market opinion.
“Maybe the markets are right, that central banks are going to pivot suddenly, and they’re not going to tee it up too aggressively before they do it,” said Derek Holt, head of capital markets economics at Bank of Nova Scotia. “Another possibility is that markets just don’t believe anything central bankers tell them anymore.”
Mr. Macklem isn’t putting too much weight on the signals that markets are sending.
“Markets can change their tone quite quickly,” he said.
He pointed to the sell-off in bonds and run-up in yields over the summer and early fall, as traders became convinced that central banks would keep interest rates higher for longer – a conviction that proved short-lived.
“The markets had lots of great explanations for that. Six weeks later, it’s pretty much fallen out. So, look, markets are going to do what markets are going to do,” he said.
“The best thing we can do is call it as we see it, and be as transparent and forthright as we can.”
Regardless of the timing of interest-rate cuts, it’s increasingly clear that they’re coming: 2024 will be a turning point for rate policy.
Canada’s inflation rate has fallen from a four-decade peak of 8.1 per cent in the summer of 2022 to 3.1 per cent in November. That’s just a notch above the Bank of Canada’s one-per-cent to three-per-cent inflation-control band. (The midpoint, two per cent, is the bank’s formal target.)
Mr. Macklem and his five deputy governors, who constitute the bank’s rate-setting Governing Council, are growing more comfortable with how things are progressing. The meeting minutes for the bank’s early-December interest-rate decision showed members of the council think supply and demand in the economy are back in balance and interest rates are likely “sufficiently restrictive” to get inflation back on track.
“I don’t want to minimize the difficulty along the path. But we’re now well down that path and we can see the destination. The target is in sight,” Mr. Macklem said.
Indeed, there could still be trying times ahead. Inflation is still too high, particularly for food and housing. And elevated interest rates – the medicine used to fight inflation – are inflicting severe pain on homeowners when they renew their mortgages.
So far, Canada has avoided the recession many economists had predicted at the start of the year. But growth has essentially stalled since spring, and consumer and business confidence is in the dumps.
“It’s too premature to judge that inflation is down at this point in time,” Scotiabank’s Mr. Holt said, pointing to several factors adding to price pressures, including a weak Canadian dollar, rapid wage growth and high levels of immigration that are pushing up shelter costs. “I think for the next six months, they should resist the market pricing for a rate cut over that period of time, and still retain a bias that they may or may not be done.”
But there’s also a risk to keeping borrowing costs high in an economy that is already stagnating. They could tip already strained businesses and consumers into a deeper and longer slump.
“To me, the biggest risk is that businesses say: Uh oh, sales are going to be atrocious next year, labour is expensive, let’s cut a lot of people from our payrolls,” said Dawn Desjardins, chief economist at Deloitte Canada. “Then the labour market crumbles.”
Moreover, Canadians are more sensitive to interest rates than their U.S. counterparts, because of higher levels of household debt in Canada and shorter mortgage terms.
As of late November, only 45 per cent of Canadian homeowners with a mortgage had seen their monthly payments rise since the bank started increasing interest rates in 2022. That proportion will keep growing, with many homeowners facing large payment shocks. Bank of Canada economists estimate that the median monthly payment for all mortgages will jump by $400, or 34 per cent, between early 2022 and 2027. The most heavily indebted borrowers could see payments rise by more than 50 per cent.
Some economists worry that the Bank of Canada’s decision makers could underestimate how big a blow this will be to the economy.
“They don’t want to run the economy into the ground, especially if they’re having this success of getting the inflation rate down with modest damage to the economy,” Ms. Desjardins said.
Meanwhile, the bank is feeling increasing pressure from political quarters to change tack.
In September, the premiers of Ontario, British Columbia and Newfoundland and Labrador wrote to Mr. Macklem urging him to stop raising interest rates. Federal Finance Minister Chrystia Freeland publicly celebrated the bank’s decision to hold rates steady that month – a remark that some economists said was inappropriate, given the central bank’s long-recognized independence from political influence.
Mr. Macklem responded to the premiers with his own letter, asking them to refrain from weighing in on interest-rate policy.
“I am very receptive to hearing from all levels of government on how our policies are affecting their citizens, how it’s affecting businesses, how it’s affecting their economy,” Mr. Macklem said in the interview.
“However, when they give us specific advice about what to do with interest rates, my concern is that that creates a perception, or could create a perception among some Canadians, that the central bank is not independent. And I don’t think that’s in anybody’s interest.”
The tricky part is that the bank itself is increasingly dipping its toes into political waters. In his regular appearances before Parliament, Mr. Macklem has largely avoided being drawn into debates about fiscal policy and carbon pricing. But the bank has, of its own accord, begun commenting on hot-button issues around housing and immigration.
Earlier this month, deputy governor Toni Gravelle gave a speech arguing that high levels of immigration, combined with a shortage of housing supply, are driving up rents and could be limiting the fall in home prices. He argued that all levels of government need to work together to speed up home construction to get a handle on shelter inflation.
Mr. Macklem acknowledged that commenting on politically sensitive issues is a “risk.” But he feels it’s appropriate when those issues overlap with inflation and monetary policy.
“We’re not going to provide running commentary, we’re not going to get drawn into specific policy choices. But I think we have a responsibility to outline to Canadians: This is a big force on the economy. Here’s how it’s impacting the outlook; here’s how it’s impacting inflation,” he said.
With 3½ of the most challenging years in central banking history in the rear-view mirror, Mr. Macklem said he’s looking forward to a period less dominated by crises.
He said inflation should be getting close to the two-per-cent target by the end of next year. And because interest-rate changes work with a lag, the bank could start lowering interest rates well before reaching that target, when inflation is on a “sustained downward track.”
Scotiabank’s Mr. Holt said that if Mr. Macklem can bring inflation home, without a severe recession, then any mistakes along the way will be forgiven.
“I think he can redeem himself fully, and bygones be bygones, he will have gotten a pretty solid grade at the end of it all. But it’s much too premature to be judging that at this point.”
Finally reaching that goal would give the Bank of Canada, and the rest of the country, more space to tackle longer-term economic challenges, including the country’s perennially poor productivity, Mr. Macklem said.
But central banking won’t necessarily become easier.
“We’re heading back to normal, but it’s not the old normal,” he said, noting that the Canadian economy could be buffeted by supply shocks, stemming from geopolitical tensions and climate change, more than in the past. “We’ve got to be ready for that as an institution.”
Meanwhile, the Bank of Canada is making changes in response to its communications and forecasting shortcomings of the past few years. Beginning in 2024, it will hold news conferences after each of its eight rate decisions a year, rather than only after the four decisions that are accompanied by a quarterly Monetary Policy Report. And the bank is developing new forecasting models to help better understand inflation and manage risks.
“It’s not about learning some lessons and giving some speeches about it. It’s about learning some lessons and then taking those on board and building better tools,” Mr. Macklem said.