In a speech delivered at the Calgary Chamber of Commerce, Bank of Canada Governor Tiff Macklem suggested that the central bank might need to further raise interest rates due to the persistence of high inflation. This statement followed the recent decision by the Bank of Canada to maintain its key interest rate at five percent, even as signs of an economic slowdown become more evident.
Statistics Canada had reported a contraction in the economy during the second quarter, and the unemployment rate had risen for three consecutive months. Despite these challenges, Governor Macklem indicated that the Bank’s governing council agreed that additional rate hikes might be necessary.
“In trying to balance the risks of under- and over-tightening, the governing council decided yesterday to keep the policy rate at five percent and agreed there may be a need to raise the policy rate further if inflationary pressures persist,” stated Macklem.
Canada’s inflation rate was 3.3 percent in July, and the Bank of Canada expects inflation to remain elevated in the coming months before gradually declining.
Governor Macklem also addressed concerns about the central bank’s political independence, given comments from elected officials regarding its policy decisions. Finance Minister Chrystia Freeland had earlier expressed relief over the decision to maintain the key rate, which drew some criticism, and the NDP had called on the finance minister to request that the Bank of Canada halt further interest rate hikes.
Macklem emphasized that elected officials are receiving feedback from constituents about the challenges posed by high inflation and rising interest rates, echoing concerns raised at the central bank. He declined to comment on what action the bank would take if the finance minister issued a directive regarding interest rates, noting that the deputy prime minister had affirmed respect for the Bank of Canada’s independence.
Governor Macklem dedicated a significant portion of his speech to defending the central bank’s inflation target, asserting its importance in ensuring economic predictability and stability. While inflation may appear close to the target of two percent, reaching that goal is essential for sustaining economic consistency.
Macklem suggested that the slowdown in progress towards reducing inflation could indicate that previous rate hikes require more time to have an impact or that interest rates are not yet high enough. The central bank is closely monitoring not just falling inflation but also a reduction in significant price increases throughout the economy.
Governor Macklem clarified that the central bank’s objective is not to impede economic growth but rather to ensure that inflation returns to the two percent target. When questioned about the possibility of Canada entering a recession, Macklem indicated that he did not believe the country was already in one. However, he acknowledged the potential for two consecutive quarters of slightly negative growth, which would meet the technical definition of a recession. Nevertheless, he emphasized that such negative quarters would not align with the traditional image of a recession characterized by a substantial contraction in output and a significant rise in unemployment.
