–BOC Sees Upside and Downside Risks to Its Forecast as ‘Balanced’
–Macklem: ‘We Are More Concerned About Upside Risks’
–Macklem: Too Early to Talk about Cutting Rates
(MaceNews) – Bank of Canada Governor Tiff Macklem on Tuesday repeated his recent remarks that the bank’s pausing in its credit tightening is “conditional” that overheated domestic economic activity will cool off further and easing but still “too high” inflation will drift toward its 2% target in line with its projection released last month.
Overall, Macklem said, the bank’s policymakers see the upside and downside risks to their inflation forecast as “balanced” but also warned that with inflation still well above the target, “we continue to be more concerned about the upside risks.”
Last month, the bank raised its policy interest rate by 25 basis points to 4.50 percent, as expected, in an eighth consecutive hike in the tightening phase that began in March. It is expected to hold its policy stance steady for now.
“At the end of January, we said that we expect to pause rate hikes while we assess the impacts of the substantial monetary policy tightening already undertaken,” Macklem said in a speech on “monetary policy at work” to a group of chartered financial analysts in Quebec City. “This is a conditional pause – it is conditional on economic developments evolving broadly in line with the outlook published in January.”
The governor reminded that the conduct of monetary policy needs to be forward-looking because the transmission mechanism takes time, about 18 to 24 months before changes in the overnight rate will have their full impact.
Later, in comments to reporters, Macklem dismissed a suggestion that the bank is likely to consider rate cuts this year, as financial markets expect. Macklem said it is “far too early” to talk about rate cuts. The bank has paused rate increases, and “the question is whether we have done enough” to bring inflation down to target, he said.
“In other words, we shouldn’t keep raising rates until inflation is back to 2%,” he said. “Instead, we need to pause rate hikes before we slow the economy and inflation too much.”
“If new evidence begins to accumulate that inflation is not declining in line with our forecast, we are prepared to raise our policy rate further,” said the governor. “But if new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further.”
Among upside risks, the biggest is that global energy prices could increase, pushing inflation up around the world, Macklem said, adding that the bank’s policymakers are also concerned that inflation expectations could remain elevated and increases in labour costs could persist.
As for downside risks, he said that global growth could slow more sharply than the bank’s Governing Council expects, and that financial vulnerabilities could amplify the slowdown. Canadian households could pull back more than the bank expects as they adjust to higher interest rates, he added.
“In summary, recent developments have reinforced our confidence that inflation is coming down,” the governor said. “We now expect CPI inflation to fall to around 3% in the middle of this year and reach the 2% target in 2024.”
Canada’s consumer price index rose 6.3% on year in December, decelerating from 6.8% in November and 6.9% in October and a recent peak of 8.1 percent in June 2022, led by smaller gains in the prices for gasoline and durable goods, but it is still well above the bank’s 2% target.
“For inflation to get back to 2%, supply needs to catch up with demand and services price inflation needs to cool,” Macklem said. “Wage growth will need to moderate alongside inflation expectations, and pricing behaviour normalize. If those things don’t happen, inflation won’t come back to our 2% target, and additional monetary tightening will be required.”
The domestic labor market remains tight. Employment surged by 104,000 in December, well above expectations, and the unemployment rate declined 0.1 percentage point to 5.0%, just above the record low of 4.9% reached in June and July last year. Canadian jobs data for January due Friday is expected to show employment in January rose at a slower pace of around 15,000, slightly pushing up the unemployment rate to 5.1%.