–Macklem: Too Early to Discuss Lowering Interest Rates
–Macklem: Could Start Easing if Conditions Met but ‘We Are Not There Yet’
–Macklem: Policy Decisions are Getting Difficult, Aware Canadians Feeling Pain of Higher Rates
By Max Sato
(MaceNews) – Bank of Canada Governor Tiff Macklem said Thursday that the bank’s policymakers are prepared to raise interest rates further if necessary because they are concerned about easing but sticky inflationary pressures.
He stressed that it is “too early” to discuss the need for a rate cut but also noted that while he and other members of the policy board are trying to avoid under-tightening, they do not wish to over-tighten and kill the economy.
Macklem repeated the bank’s hawkish tone in a speech to the Calgary Chamber of Commerce a day after Governing Council decided to maintain the policy interest rate — the target for overnight lending rates — at a 22-year high of 5.0% following weaker-than-expected GDP data that showed a slight contraction in the second quarter.
“With past interest rate increases still working their way through the economy,
monetary policy may be sufficiently restrictive to restore price stability,” he said.
“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,” he concluded, repeating the bank’s policy statement issued Wednesday after the no-change decision.
The governor defended the norm among major central banks that a 2% inflation target has helped bring about price stability, saying inflation targeting has worked well to stabilize Canada’s economic and financial system for the better part of three decades. He repeated his earlier remarks that around 3% inflation, at the top of the bank’s 1% to 3% target range is not good enough, and that the bank is trying to bring it all the way down to the midpoint of 2%.
“Experience here at home and in countries around the world shows that 2% inflation has worked to deliver solid and sustainable economic performance,” he said.
Macklem said the bank’s policymakers are aware that monetary policy decisions can affect things like household debt, which can make the financial system unstable.
“So our monetary policy is flexible. For example, we might change rates more slowly if moving faster could make the financial system more vulnerable to a big economic crash later on.
On the balance between demand and supply in the economy, the governor said, “For inflation to continue to decline, we need demand to continue to grow more slowly than supply for a period of time. That will relieve price pressures, slow increases in labour costs and restore normal price-setting behaviour.”
Among key data that the bank is monitoring, he said, “We’re seeing signs that labour demand is cooling from overheated levels earlier in the year, allowing labour supply to begin to catch up with demand. Employment was roughly flat in July, marking the fifth time in the last six months that job growth has been below the pace implied by population growth.”
During the question-and-answer session, Macklem was asked whether he thinks the bank has not finished tightening yet. He replied, “The answer is we will see. We are going to take it one meeting at a time.”
He said inflation has come down from a recent peak of 8.1% in June 2022 to around 3% but noted that the progress has slowed, with the total CPI ticking up to 3.3% on year in July after moderating to 2.8% in June from 3.4% in May.
“The decisions are getting difficult,” Macklem said. “We know Canadians are feeling the pain of higher interest rates but the target is in sight. The destination is worth it and we need to stay the course.”
The bank is projecting slower economic growth but not a sharp downturn, he said, adding, “We are not projecting a big surge in unemployment.”
Later at a news conference, Macklem said the carbon tax in Canada aimed at reducing pollution “has a relatively small effect on inflation” of raising prices by about 0.15% each year.
The recent rise in global oil prices will lead domestic gasoline prices higher and push up inflation in the short run, the governor predicted.
“For the next at least two months, you are probably going to see headline inflation prints higher,” he said, “We expect inflation should ease but going forward, as I’ve underlined a number of times, we are going to be looking for further evidence of inflationary pressures are easing.”
The bank said its policy statement on Wednesday that Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation, repeating its July statement. “In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the 2% inflation target.”
Asked about future policy moves, Macklem said, “When the economy is in balance and inflation is back to 2%, we do expect the interest rate could come down.”
“Given that monetary policy needs to be forward-looking, you could well start that before you are all the way there, but we are not there yet,” he said. “It is much too early to be taking about interest rate cuts.”
—
Contact this reporter: max@macenews.com
Content may appear first or exclusively on the Mace News premium service. For real-time delivery in entirety cntact tony@macenews.com. X (Twitter) headlines @macenewsmacro.