The Bank of Canada’s Inflation Target in Sight, but Additional Rate Hikes May Be Needed
The head of the Bank of Canada, Tiff Macklem, addressed the Calgary Chamber of Commerce on Thursday, stating that the central bank’s goal of achieving a two per cent inflation rate is “now in sight.” However, he cautioned that persistent price pressures might require further interest rate increases. This comes after the bank’s recent decision to keep its benchmark interest rate stable, marking only the third time this year. In his speech, Macklem acknowledged the progress made in taming inflation but expressed concerns about the stalled momentum in the fight against rising prices.
Macklem emphasized that the path back to the two per cent target is challenging. He attributed much of the current fuel for Canada’s inflation rate to the increase in mortgage costs linked to the bank’s rate hikes. Despite the difficulties, he argued that without tighter monetary policy, inflation throughout the economy would become a more significant problem. Macklem acknowledged that higher interest rates are painful but asserted that reaching the two per cent target is worth the short-term challenges.
Annual inflation in Canada rose to 3.3 per cent in July, half a percentage point higher than the previous month. Macklem suggested that monetary policy might be sufficient to restore price stability, but he warned about the potential for ongoing upward pressure on prices. While the Bank of Canada is prepared to raise interest rates if necessary, Macklem emphasized that they do not want to overtighten monetary policy. Balancing the need to address inflation with the impact on Canadians is crucial.
Macklem defended the Bank’s two per cent inflation target, countering criticisms that the central bank should ease up on its tightening cycle. He argued that the target provides predictability for Canadians and businesses and prevents inflation from becoming more volatile. The Bank of Canada’s latest forecasts project a return to two per cent inflation by mid-2025. Macklem firmly stated that the two per cent target is both achievable and necessary, and the central bank is committed to staying the course.
While the Bank of Canada is not aiming to stifle economic growth, Macklem expressed the need for a period of slower growth to alleviate price pressures. He acknowledged the softening labour market, with declining job vacancies and a rising unemployment rate. However, he noted that wage growth has yet to show signs of moderation, remaining between four and five per cent. The Bank will closely monitor wage growth, corporate pricing, inflation expectations, and underlying price pressures in determining the need for future rate adjustments.
The Bank of Canada’s next interest rate decision is scheduled for October 25th.
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