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Central bank governor did not rule out further rate increases
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Bank of Canada governor Tiff Macklem says it’s “too early” to be thinking about interest rate cuts even though inflation has come down substantially from a high of around eight per cent.
On Sept. 6, the Bank of Canada held the key overnight interest rate at five per cent in its first rate decision since a 25-basis-point increase in July, giving some observers hope the central bank could soon reverse a string of rate increases that is putting indebted Canadian households under pressure.
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But following a speech to the Calgary Chamber of Commerce on Sept. 7, Macklem said rate cuts are not likely in the near future and, even if the central bank’s target of two per cent inflation is reached, interest rates are unlikely to return to the historic and sustained lows of the period following the 2008 financial crisis.
“It’s too early to be thinking about interest rate cuts because we’re not there yet,” Macklem said during a question-and-answer session after his Calgary speech.
And when they do come, he said “they could well settle at something higher than we saw in previous decades.”
Macklem also did not rule out further rate increases, adding that the rapid hikes over the past year or so were necessary to tame inflation, a fight that is still a work in progress.
“Maybe we don’t need to do more but maybe we do,” he said.
In his speech, Macklem acknowledged that the single price increase having the biggest impact on consumer price index inflation is mortgage interest costs, running about 30 per cent higher than a year ago. Stripping out these higher costs, which have been driven by the higher interest rates set by the central bank itself, would put CPI inflation at 2.5 per cent, which some argue is close enough to the central bank’s two per cent target. But Macklem countered that after stripping out volatile components such as energy prices, the underlying trend shows inflation is still well above target.
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He added that the bank’s decisions on interest rates will be informed by the fact that the longer the underlying trend remains too high, the harder it can be to bring inflation down.
“When households and businesses expect inflation to be above two per cent, buying patterns and corporate pricing behaviour adjust,” he said, adding that reaching sustainable inflation at the target level will require that demand continues to grow more slowly than supply for a period of time.
“It’s working. We’re not there yet but we’re going to get there.”
I want to be clear — we are not trying to kill economic growth
Tiff Macklem
If the Bank of Canada target for inflation is reached, that will contribute strong, sustainable growth and a healthy labour market, Macklem said.
“I want to be clear — we are not trying to kill economic growth.”
The latest forecast from the central bank, which is expected to be updated in October, has inflation coming back down to around two per cent by 2025.
Speaking with media after his speech, Macklem said interest rates could begin to come down before then if economic indicators pointed to the inflation target being reached, but he cautioned that certain underlying inflationary pressures are “stubbornly persistent” and momentum to rein them in has slowed.
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In his speech, he noted that wage growth has yet to show clear signs of moderation, with most measures around four to five per cent, and that prices for many items rose in July, including double-digit increases for bakery, cereal products and baby food.
“We’ve come a long way,” Macklem said during the media session, noting that inflation was around eight per cent last summer and central bank intervention included interest rate increases of 75 and 100 basis points at a time in 2022.
He added that there are clear signs the monetary policy is working.
“You can see the adjustment in the labour market, you can you can see the impact of higher interest rates on household spending, particularly in interest sensitive items. It looks like it’s starting to spread to services,” he said.
“So in that sense … the target is in sight.”
• Email: bshecter@nationalpost.com
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