It’s still too early to consider undoing the most aggressive series of rate hikes in decades, central bank governor says
Governor Tiff Macklem appears not to be thinking about lowering the Bank of Canada’s policy interest rate, as he stated on December 15 that it is still too early to think about rolling back the most aggressive set of rate hikes in decades. Two days after US Federal Reserve chair Jerome Powell added gasoline to the fire by implying that interest rates were at or near their top, Macklem made the comments at his year-end speech at the Canadian Club Toronto on Friday. Denise Paglinawan of The Financial Post explains the key points of Macklem’s speech.
It’s too early to consider cuts
Despite popular expectations that the Bank of Canada will begin reducing interest rates in 2019, Macklem stated that rate cuts are off the table until the bank has proof that Canada is unmistakably headed back toward two percent inflation. According to Macklem, the central bank need not wait for inflation to reach its goal in full before considering relaxing policy, but it must be evidently moving toward two percent. “We can start talking about cutting our policy interest rate when it’s evident that inflation is on a sustained downward track,” he stated. Because it’s too early to have that conversation, we haven’t started one yet.
Economic growth is expected to remain weak into 2024
According to Macklem, the extra demand that raised prices during the previous two years has subsided. He said that tighter global financial conditions and higher interest rates had contributed to the economy’s rebalancing. Macklem predicted that the next two to three quarters will be challenging for many due to the slowing economy and the excessively high cost of living. He predicted that businesses would face low demand, consumers would continue to restrain their spending, and the rate of increase in employment in the labor market would likely slow down. This suggests that the unemployment rate will probably rise even further.
Expect some push and pull on inflation
Canadians could anticipate some push and pull on inflation in the upcoming months. Macklem stated that other factors will continue to push prices upward even though the cooling economy will lessen price pressures. Further drops in inflation will therefore probably be gradual. He said that it’s also impossible to rule out some fresh shocks. One possibility is that a war in Europe or the Middle East may intensify, causing trade, investment, and supply chain disruptions. Both domestically and internationally, climate-related incidents have increased in frequency and severity. Prices are frequently impacted by these risks, so the bank must be on guard and prepared to make adjustments as needed.
2% inflation isn’t here yet, but the target is ‘in sight’
According to Acklem, reflecting on 2023 shows us how far we’ve come. “The goal of two percent inflation is already within reach. And even if we haven’t arrived yet, the circumstances seem to be aligning to lead us there,” he stated. According to Macklem, more downward momentum in core inflation is still required. The bank will be closely monitoring the supply-demand balance, wage growth, business pricing practices, and inflation expectations as it evaluates Canada’s progress toward price stability. By the end of the next year, Macklem predicted, inflation will be approaching the two percent target.
Source: Financial Post
Published Dec 15, 2023, • Last updated Dec 15, 2023, • 3-minute read
