–Macklem: We Are Taking One Meeting at a Time
–Macklem: Need to Confirm Underlying Inflation Falling Before Discussing Lowering Rates
–Macklem: Concerned about Short-Term Inflation Expectations Falling Slowly
By Max Sato
(MaceNews) – Bank of Canada Governor Tiff Macklem said Wednesday that the bank’s policy interest rate at 5% may be restrictive enough to bring inflation back to the 2% target but there is no clear evidence yet that underlying inflation is on a downtrend.
The central bank has raised the key interest rate “forcefully” by 475 basis points (4.75 percentage points) since March 2022, cooling the overheated economy, taking the steam out of inflation and averting the need for even higher interest rates later, the governor said in a speech to the Saint John Region Chamber of Commerce in New Brunswick.
“This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability,” he said. “But if high inflation persists, we are prepared to raise our policy rate further.”
He also repeated his recent remarks that the bank’s policymakers are trying to balance the risk of over- and under-tightening.
“We expect the economy to remain weak for the next few quarters, which means more downward pressure on inflation is in the pipeline,” Macklem said. “In short, the excess demand in the economy that made it too easy to raise prices is now gone.”
Easing inflation in the October CPI data released Tuesday, combined with today’s comments by the governor, suggest that the bank is likely to stand pat again at its next meeting on Dec. 6 after deciding last month to maintain its policy interest rate — the target for overnight lending rates — at a 22-year high of 5.0% in the face of a dimmer business outlook and gradually easing price pressures. It followed a pause in September, a 25-basis point hike each in July and June, a conditional pause in April and March and an eighth consecutive increase in January.
But later a news conference, the governor stressed that the bank’s policy stance is not pre-set and there is still an upside risk to prices. He said the bank’s policymakers are “concerned” that short-term inflation expectations among households and businesses are coming down only slowly.
“We need to see sustained evidence that underlying inflation is coming down to be more confident,” he said. “Underlying inflation is running at 3% and if we see that persist, that is still well above the target. There may be a need for higher interest rates.”
“We are taking one meeting at a time,” he said.
The governor was asked several times as to when and under what conditions the bank’s Governing Council would consider lowering interest rates.
“We don’t need to wait until inflation is back to 2% before we start lowering interest rates,” Macklem responded, noting monetary policy works with a lag.
“When we are confident that inflation is clearly on a path back to 2%, it will be a time to start that discussion about whether to cut interest rates,” he said.
Macklem noted that while the latest CPI data is good news for Canadians, it
has shown some volatility. Consumer inflation eased back to 3.1% in October from 3.8% in September after accelerating to 4.0% in August from 3.6% in July in light of higher energy prices. It had slowed to 2.8% in June, which was the lowest since 2.2% in March 2021 and a sharp drop from a recent peak of 8.1% hit in June 2022.
“What we are looking at is underlying inflation; we particularly use the core measures to look at that,” he said. “They’ve been running for the last number of months at 3.5 to 4(%). Yesterday they came out at around 3.5, so pretty much at the lower end of the range.”
The three-month average of the core measures stands at about 3% but the governor warned that “they are volatile and one month is not a trend.”
“When we see a clear trend that we are clearly going back to 2(%), it’ll be a time to start discussing whether it is time to lower interest rates,” he said.
Macklem made it clear that it is still too early to foresee when to cut rates: “Right now, we are still assessing whether interest rates are high enough. They may be high enough; they may be restrictive enough to get us back… you don’t want to be half-hearted in your efforts to get inflation back to target.”
As the central bank has tightened monetary conditions, domestic wage growth has shown “some deceleration” but the bank is looking for “gradual easing” in wage growth and higher productivity, the governor said.
Asked if rising services costs in the CPI are beneficial for households if they reflect higher wages, he said that the main contributor to the 4.6% rise on year in services in October came from shelter, but that wage growth has not yet fully filtered through to consumer prices.