–Governor Says Under-Tightening Will Pose Greater Risk Than Over-Tightening
–Macklem Declines Comment on How Long Restrictive Interest Rates Will Last
–Macklem: Rate Hikes Could Work Faster Than Before, Watching New Sets of Data
By Max Sato
(MaceNews) – The Bank of Canada is determined to bring elevated inflation “all the way back” to its 2% target, Governor Tiff Macklem on Monday said, calling under-tightening “a greater risk” compared to “over-tightening” at a time when consumer inflation remains high at 6.9%, although it has eased from a recent peak of 8.1%.
The bank is trying to balance between the risks of over-tightening monetary policy, which could drive the economy into a painful recession, and the risk of under-tightening, which could let people expect persistently high inflation and would require much higher interest rates, Macklem said.
“The risk of not sufficiently committed, not doing enough, given inflation is well our target, that looks like a bigger risk,” he told reporters, when asked how long the high interest rates that will restrict economic activity will last.
The bank has raised rates by 4 percentage points since March and its effects have started to be seen in the economy, he said.
“We are going to be looking at incoming data to determine whether rates need to rise further,” Macklem said. “In terms of how long they are going to rise, we are going to take those decisions one at a time as we move forward, but what I would highlight is that inflation is well above our target and long way back to our 2% target.”
“We are resolute in our commitment to bring inflation all the way back to 2%,” he stressed.
In a speech to the Business Council of British Columbia delivered earlier on Monday, Macklem said over the long term, it seems likely that Canada won’t have the same disinflationary forces that it has had for the past 30 years.
“These potential developments could make it harder to bring inflation back to the 2% target and keep it there. But how much harder is very difficult to say,” he said.
On whether the bank would hint at pausing in the current tightening cycle, the governor said, “We are certainly telling Canadians how we see the economy. We are telling them what our outlook for inflation is and what risks are around that inflation and what we see as implications for interest rates, but I’m going to leave our future decisions to the future.”
Macklem noted the bank did remove its “forward guidance” on near-term monetary easing commitment in January this year after having used it to keep expectations that interest rates would remain very low and support economic recovery from the pandemic-hit slump.
Last week, the BOC raised its policy interest rate — the target for overnight lending rates — by 50 basis points to 4.25% from 3.75% in a seventh consecutive hike in the tightening phase that began in March aimed at bringing high inflation back to its 2% target. At the same time, the central bank signaled that the phase of aggressive tightening is over, suggesting that its policy-making panel will decide whether to the bank will need to raise rates further at each meeting.
The bank is scheduled to announce its next monetary policy decision on Jan. 25, when it also releases its latest medium-term GDP and CPI forecasts as well as risk analysis in its quarterly Monetary Policy Report. Many economists expect the bank to pause after today’s action while some anticipate a smaller 25-baisis point hike to wrap up the tightening phase.
Asked about recent comments by former Bank of Canada governor Stephen Poloz that the economy is more sensitive to monetary policy tightening these days compared to five to 10 years ago, Macklem replied, “There certainly is potential for it to have a bigger impact.”
“Household indebtedness has increased considerably since interest rates were this high,” he said, but added that “there are some counterbalancing factors” including excess savings built up during the pandemic while consumers could not spend on vacations and restaurant meals, which “may provide some buffer.”
“Overall, it is plausible that interest rates could work a little faster than in the past,” Macklem noted. “That is something that we are looking at and taking into account.”
The bank’s policymakers are closely monitoring new data sets and surveys, he said.
“We are in the midst of a difficult transition, but it is going to work,” the governor said, arguing that the bank’s inflation targeting framework is well designed and reviewed every five years. “Growth will restore and inflation will come down. We are not going to sleep easy at the Bank of Canada until we get there.”
“When snow melts, when we get to the spring, we should see much clear evidence that inflation is moving down,” he said, referring to the second quarter of 2023.