OTTAWA 鈥� The Bank of sa国际传媒 hiked its key interest rate on Wednesday, by 0.25 of a percentage point to five per cent.聽
Governor Tiff Macklem says inflationary pressures aren鈥檛 easing as quickly as the central bank wants, and more rate hikes could be coming if the economic data supports it.
Here鈥檚 what we learned from the Bank of sa国际传媒鈥檚 decision and monetary policy report, and remarks from Macklem and senior deputy governor Carolyn Rogers as they spoke to reporters after the announcement.聽
Recession likely not in the cards
The Bank of sa国际传媒 doesn鈥檛 expect a recession, despite the squeeze higher rates are putting on the economy, Macklem said.聽
The central bank expects economic growth to average around one per cent for the next year before picking up after that.
鈥淲e need a period of growth below trend, below potential, to let supply catch up with demand. That's what's going to relieve those price pressures,鈥� Macklem said.聽
鈥淏ut we do think that there's a path back to price stability, while with the economy still growing.鈥�
Two per cent inflation is still far away
The central bank doesn鈥檛 see inflation reaching its target of two per cent until the middle of 2025.
Macklem said he expects the consumer price index, which measures inflation to grow at around three per cent for the next year before gradually declining to target.聽
鈥淭his is about six months later than we expected in April,鈥� he said.聽
Don鈥檛 expect rate cuts any time soon
Interest rates may get even higher if the data supports it, but they鈥檙e not getting lower in the near future, Macklem said.
鈥淚t's clearly too early to be talking about interest rate cuts,鈥� he said.聽
鈥淲e are certainly trying to balance the risks of over- and under-tightening and we'll be taking it one meeting at a time.鈥�
Population growth is both hurting and helping inflation
sa国际传媒鈥檚 rapidly growing population, which recently surpassed a milestone at 40 million, is contributing to inflationary pressure with spending and housing demand, Macklem said.聽
That鈥檚 despite the fact that newcomers to sa国际传媒 are also helping ease tightness in the labour market.聽
鈥淩apid population growth is contributing to both supply and demand in the economy,鈥� Macklem said. 鈥淣ewcomers to sa国际传媒 are entering the labour force, easing labour shortages, but at the same time they add to consumer spending and the demand for housing.鈥澛�
Pandemic savings are still flowing
While Macklem acknowledged that higher interest rates are likely hurting many Canadian households, he said spending is still strong, especially on services, and that鈥檚 contributing to stubborn inflation.
One potential reason for this is that the savings Canadians built up during the pandemic are helping buoy spending despite rate hikes, he said.
鈥淪ome households have cut back on spending because inflation and higher interest rates have eaten into their budgets, and some are being severely squeezed,鈥� said Macklem.聽
鈥淏ut for many, larger savings may be acting as a buffer and supporting consumer spending.鈥�
The central bank is in a balancing act
The Bank of sa国际传媒 is concerned that if it doesn鈥檛 act strongly enough now, Canadians will pay the price later, said Macklem.
鈥淭he downward momentum in inflation is waning, and we are concerned that if we're not careful, the progress to price stability could stall,鈥� he said.聽
If the economy sees any upward surprises, inflation could even move back up, warned Macklem.聽
鈥淲e're trying to balance the risks of under and over tightening,鈥� he said.聽
鈥淲e know that if we don't do enough now, we'll likely have to do even more later. We also know, though, that if we do more than we need now, it's going to be unnecessarily painful.鈥�
This report by The Canadian Press was first published July 12, 2023.
The Canadian Press
