‘We’re seeing what we need to see. We just need to see it for longer’: Tiff Macklem explains the BoC’s thinking as it moves toward a pivot

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Bank of Canada Governor Tiff Macklem spent much of the past year shooting down speculation about when interest rates will start coming down. On Wednesday, he let his guard slip.

At a news conference following the latest stand-pat rate decision, Mr. Macklem was asked whether a June rate cut was within the realm of possibilities. After a long pause, he responded: “Yes, it’s within the realm of possibilities.”

To the uninitiated, that might seem like a small admission. But in the carefully choreographed language of central bankers – who can move multibillion dollar markets with the change of an adjective – it was a major signal.

Whether interest rates start coming down in June, July or later depends on the next few inflation reports. And this week’s higher-than-expected inflation data from the United States puts the Bank of Canada in a tricky spot.

But the bank’s governing council has clearly begun debating when to start easing monetary policy. And for the first time since the early months of the pandemic, rate cuts are on the table.

The Globe and Mail sat down with Mr. Macklem several hours after the news conference to ask about rate cuts, a possible divergence between the Bank of Canada and the U.S. Federal Reserve, government spending and why central bank officials are sounding the alarm about Canadian productivity.

The interview has been edited for length and clarity.

I have to start with your comment about a June rate cut being “within the realm of possibilities.” Is that a more or less likely possibility right now?

Tiff Macklem: Those weren’t my words, those were [Canadian Press reporter Nojoud Al Mallees’s words]. I was asked the question. Look, the answer is yes. It’s not the only possibility. And we’re going to take our decisions one at a time.

I’m not going to put it on a calendar. But we’ve been pretty clear, we’re encouraged by the progress we’ve seen. Since January – you look at all our inflation indicators – some are making more progress than others, but they’re all moving in the right direction. And what we’re looking for is for that to be sustained. We want to be confident that that’s durable. And when we are confident that it’s durable, it will be appropriate.

So we’ll see what decision date that actually happens on. But the message is we’re moving in the right direction. We are getting closer. We’re seeing what we need to see. We just need to see it for longer.

You talked about a diversity of views on the governing council about the timing of rate cuts. Are you on the hawkish or dovish side of those debates?

TM: We have a consensus-based system. … Now in our summary of deliberations we do lay out what was the range of discussion, what were the prominent points. We don’t assign names to those. … It’s not about where he or she sits. It’s really about where’s the centre of the table? What’s the consensus? What’s the decision everybody will support?

You said you’re concerned about cutting interest rates too early and too fast. When you do get around to lowering rates, is it likely going to be one after another, in a consistent line of cuts? Or could it be a stop-go process?

TM: You’re getting a little ahead of yourself here. Obviously this week we held our policy. I’ll say a couple of things. If you look at our own forecast, inflation comes down very gradually. And as we’ve indicated, if the data come out broadly in line with our forecast, it will be appropriate to lower the policy rate this year.

But with inflation coming down very gradually, I think it’s reasonable to infer that that policy path will be pretty gradual too. So to answer your question more directly, I think those are both possibilities. We haven’t had that discussion yet, but there’s more than one way to get to a gradual path.

The latest U.S inflation data came in hot. Markets are paring back expectations for Federal Reserve rate cuts. How far ahead of the Fed can you get before it starts to become a concern?

TM: We have our own currency in this country, we have a flexible exchange rate and that means we can run our own monetary policy in this country that’s geared to what Canada needs. I think the Fed and the Bank of Canada are asking themselves many of the same questions; we both want to be confident we’re clearly on a path back to 2 per cent inflation.

We’re trying to balance the risks. I mean we don’t want monetary policy to be this restrictive for any longer than it needs to be. But we’re very conscious that we’ve worked hard to get inflation down to where it is. We’ve made a lot of progress. We don’t want to cut too early or cut too quickly and jeopardize that progress.

What happens in the U.S. definitely has an impact on Canada. It has an impact through our trade relationship. Our financial markets are very integrated. So that’s something we’re going to have to take into account. But we don’t need to do exactly what the Fed does. We can run our own monetary policy.

The bank upgraded its economic growth forecast and downgraded its inflation forecast. How can we have both a better growth picture and what looks like a more optimistic inflation path?

TM: The boost in the population is adding to both demand and supply. You’ve got more people, they’re buying more houses, they’re renting more apartments, that’s all adding to demand. At the same time, these new entrants into Canada are also new workers in the economy. So they’re adding to both demand and supply. It does have some differential effects. It’s certainly going to put more pressure on the housing market, less pressure in the labour market.

Coming back to inflation, I’d say two things. We’ve seen inflation coming a little lower than we expected in the last couple of months. If you look at the three-month rates of core inflation, you can see they’re now below the 12-month. For a long time they were about the same. Now they’re below, suggesting there is some downward momentum.

The second reason comes back to the increase in population growth. We have revised up our estimate of potential output. So, yes, growth is stronger in 2024, but potential output growth is also stronger in 2024. So if you look at the output gap, which really gives you the measure of the price pressure generated within our economy, we’ve moved into excess supply. Through this year, growth in GDP and growth in potential are about the same.

Ahead of the April 16 federal budget, Finance Minister Chrystia Freeland has said her priority is creating the conditions for interest rates to come down. Based on the announcements they’ve made so far, is the government achieving that? And what could it do to make your job easier?

TM: I’m not really going to speculate on what is or is not going to be in the budget. There have been some announcements. We’re all going to get the budget next week. We’re all going to read it carefully. We’ll have another conversation after that.

We have seen the provincial budgets, and most did increase spending. Has that made your life more difficult?

TM: I think in the last Monetary Policy Report we had growth of about 2.25 per cent in government spending. Now we’re at about 2.75 per cent. That difference is largely those provincial budgets.

We did revise up our estimates of population, and when provinces have more people, they have more people to serve. That’s probably one factor that’s getting reflected in their budgets. Having said that, 2.75 per cent growth in government spending is now somewhat above growth in potential, which we think is about 2 per cent. So it’s not making it any easier to get inflation down to our 2-per-cent target.

Senior Deputy Governor Carolyn Rogers gave a recent speech where she used some pretty spicy language around the need to “break the glass” to deal with a productivity “emergency.” Weak productivity has been a challenge for years in Canada. Why is it an emergency now?

TM: Productivity is a long standing issue in Canada. I think we’ve all given more than a few speeches on productivity. Why put a renewed focus on it? In the last four years, the economy has been dominated by COVID, by rapid recovery, by build up of inflation, rapidly rising interest rates. COVID is behind us. We’ve unwound most of the inflation run up that we saw. We’re not going back to the old normal, but we are getting back to something that is feeling more normal. And productivity growth in Canada is still weak.

One thing we’re very alive to, particularly after the experience of the last four years, is that we’re probably going to be buffeted more by supply shocks going forward. The baby boomers are retiring. We’ve got higher rates of immigration that is offsetting the aging of the labour force, but it is not going to entirely offset it. Globalization, at a minimum, is shifting. It may well be working in reverse. It’s not going to be the source of prosperity growth that it’s been in the last 25 years. And we’re living the consequences of climate change.

Against that background, all those issues are going to be easier to deal with if we’ve got more productivity growth.

You flagged the risk that as interest rates start coming down house prices could start to rise. How much has that weighed on your decisions about whether to cut interest rates?

TM: It’s certainly something that we’re factoring in. But monetary policy is not geared to the housing market. Monetary policy is geared to the overall economy, and to the overall rate of inflation.

In our outlook, we have increased the housing price profile. We expect to see more demand pressure in housing going forward. We built that in. It could end up being stronger than we expected. But there are also risks on the other side. And over all we think our forecast we put out is reasonably balanced.