OTTAWA 鈥� Despite some early signs of a slowing economy, Bank of sa国际传媒 governor Tiff Macklem says more interest rate hikes are necessary to bring inflation down.
Speaking to the Halifax Chamber of Commerce on Thursday, Macklem said high inflation increasingly reflects domestic pressures on prices.
The governor said while global events such as the pandemic and the Russian invasion of Ukraine have fed into higher prices, demand is outpacing supply more broadly in the Canadian economy.
Macklem said, in hindsight, the bank鈥檚 early assessment that high inflation was temporary was 鈥渙verly optimistic.鈥澛�
As the economy fully reopened in the spring, pent-up demand for services in sectors like travel and recreation began driving inflation even higher, he said.聽
鈥淐anadians experienced these pressures first-hand when trying to book a campsite or reserve a table at their favourite restaurant,鈥� Macklem said, according to a prepared text of his speech released in Ottawa.聽
After inflation reached an annual rate of 8.1 per cent in June, the pace of price increases in sa国际传媒 has since slowed, largely due to lower gas prices. In August, the annual inflation rate was 7.0 per cent.
However, Macklem said the core measures of inflation 鈥渉ave yet to decline meaningfully鈥� even as headline inflation has come down.聽
As the Bank of sa国际传媒 monitors inflation and the effects of higher interest rates, the governor said it will be paying close attention to its core measures of inflation, which tend to be less volatile than the overall inflation rate.聽
As rising interest rates continue to slow the Canadian economy, some economists are forecasting sa国际传媒 will enter a mild or moderate recession.聽
The Bank of sa国际传媒 has previously spoken about aiming for a "soft landing," where inflation comes down without triggering a serious economic slowdown.聽
When asked whether the bank's path to a "soft landing" has narrowed during a news conference on Thursday afternoon, Macklem said the bank's primary focus is restoring low and stable inflation.
"Our mandate is clear. Our primary responsibility is price stability," he said.聽
The Bank of sa国际传媒 is set to make its next interest rate announcement on Oct. 26 and will provide updated economic forecasts in its latest monetary policy report.聽
Since March, the central bank has raised its key interest rate from 0.25 per cent to 3.25 per cent, one of the fastest rate hike cycles in its history.聽
In his speech, Macklem said there are some signs that global inflationary forces are easing, and that food inflation should soon begin to come down.聽
Despite commodity prices falling and global supply chains easing, though, these developments are not enough to bring inflation down, he said.聽
With labour markets still tight, the economy still in 鈥渆xcess demand鈥� and inflation still too high, the governor said more interest rate hikes will be necessary.聽
In a note, CIBC chief economist Avery Shenfield said Macklem's speech had a "hawkish tilt." CIBC is forecasting the central bank will raise its key interest rate by half a percentage point later this month.
Speaking to reporters, Macklem said the bank has been "very clear" about the indicators it's looking at when making its monetary policy decisions.聽
"By being clear about what we're watching, I think that helps the market digest incoming news," Macklem said.聽
The central bank has also been monitoring inflation expectations among people and businesses over concern inflation could become 鈥渆ntrenched.鈥� High inflation expectations can lead to businesses setting future prices even higher and workers demanding higher wages in future wage contracts.
The bank is set to release its consumer and business outlook surveys later this month, which will provide an update on how inflation expectations have evolved.聽
In his speech, Macklem said 聽to keep inflation expectations in control, 鈥淐anadians will need to see inflation clearly coming down.鈥澛�
鈥淪imply put, there is more to be done,鈥� he said.聽
The housing market has cooled considerably in response to higher borrowing costs. Economic growth has also slowed as the economy has posted three consecutive months of job losses. However, the full effect interest rate hikes will take time to work its way through the economy.聽
Macklem said high inflation hurts people and business by creating 鈥渦ncertainty and unfairness鈥� and distorting decision making and undermining confidence.聽
The governor said the bank is 鈥渞esolute鈥� in its commitment to restore price stability in sa国际传媒.聽
This report by The Canadian Press was first published Oct. 6, 2022.
Nojoud Al Mallees, The Canadian Press
