–Governor Repeats: Concerned About Upside Risks to Inflation Outlook
–Macklem: Short-Term Pain of Rate Hikes for Long-Term Gain in Price Stability
By Max Sato
(MaceNews) – Bank of Canada Governor Tiff Macklem on Tuesday indicated that the bank’s aggressive tightening mode is coming closer to an end but also stressed its job to restore price stability is not done yet amid elevated inflation.
He repeated the bank’s rate hike statement from last week that the Governing Council expects the policy rate “will need to rise further” but didn’t drop any hints on the scale of the next rate hike, possibly at the Dec. 7 meeting.
Instead, he said, “How much further will depend on how monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding to this tightening cycle.”
In a statement to the Senate Committee on Banking, Commerce and the Economy, Macklem said the central bank is trying to balance the risks of under- and over-tightening.
“If we don’t do enough, Canadians will continue to endure the hardship of high inflation,” he said, warning that persistently high inflation would require much higher interest rates, which could trigger a severe recession. “If we do too much, we could slow the economy more than needed,” said the governor.
“This tightening phase will draw to a close,” he said. “We are getting closer, but we are not there yet.”
Macklem noted that the central bank’s job is to ensure inflation is low, stable and predictable, but said “we are still far from that goal.”
The risks around the BOC’s inflation forecast are “reasonably balanced,” he said, referring to the bank’s latest quarterly outlook released last week that inflation in Canada will ease to about 3% in late 2023 from just under 7% now, then return to 2% in 2024. “But with inflation so far above our target, we are particularly concerned about the upside risks.”
BOC policymakers are “mindful” that adjusting to higher interest rates is difficult for many Canadians as many households have significant debt loads and higher interest rates add to their burden, Macklem said.
“We don’t want this transition to be more difficult than it has to be. But higher interest rates in the short term will bring inflation down in the long term,” he said. “It will take time to get back to solid growth with low inflation. But we will get there.”
Last week, the Bank of Canada raised its policy interest rate — the target for overnight lending rates — by 50 basis points to 3.75% in a sixth consecutive hike in the tightening phase that began in March. The move followed five rate hikes totaling 300 basis points, by 75 bps to 3.25% in September and 100 bps to 2.5% in July, which was the biggest increase since 1998.
“Coming into this meeting, interest rates were already considerably higher,” he told a news conference Wednesday after the rate decision. “Combined with the fact that there are now clear signs of the economy is slowing, we judged that it was appropriate to slow the pace of increase in our policy rates from very big steps to a big step.”
“Looking forward, we also indicated that we expect interest rates will need to rise further, so that suggests that there could be another larger-than-normal step or we may be able to move to more normal, smaller steps,” he said.