Bank of Canada Governor Tiff Macklem stated that due to the possibility of prolonged high inflation, the central bank might need to increase interest rates.
Macklem made these remarks during a speech at the Calgary Chamber of Commerce, following the central bank’s decision to maintain its key interest rate at five per cent as signs of a slowing economy emerge.
Statistics Canada recently reported a contraction in the economy during the second quarter, along with a three-month consecutive rise in the unemployment rate.
Macklem emphasized that the governing council of the central bank acknowledged the potential necessity for a further policy rate hike to curb inflationary pressures, although they opted to retain the policy rate at five per cent for now.
Canada’s inflation rate stood at 3.3 per cent in July, and the Bank of Canada predicts it might increase in the coming months before eventually subsiding.
During a news conference, Macklem addressed concerns about the central bank’s political independence, particularly in light of statements made by elected officials regarding its policy decisions.
Finance Minister Chrystia Freeland’s apparent approval of the central bank’s decision to maintain the key rate drew criticism. The NDP, critical of rate hikes, even suggested that the finance minister should urge the Bank of Canada to stop raising interest rates.
Macklem noted that elected officials are undoubtedly hearing from constituents about the challenges posed by high inflation and increasing interest rates. He emphasized the central bank’s commitment to maintaining the two per cent inflation target for the sake of economic predictability and stability.
The governor stressed that either the previous rate hikes require more time to take effect or interest rates might not be high enough yet, given the slowdown in progress towards reducing inflation.
Macklem stated that the central bank is looking for evidence of decreasing inflation and reduced large price increases across the economy, emphasizing the need for continued slowing of demand.
However, he clarified that the central bank’s intention is not to stifle economic growth. Instead, their aim is to ensure inflation returns to the targeted two per cent.
When asked about a possible recession in Canada, Macklem stated that while the country may experience two consecutive slightly negative quarters of growth, he doesn’t believe it constitutes a recession as most people understand it.
The Bank of Canada is carefully considering further interest rate hikes as they grapple with persistent concerns about high inflation and its impact on the economy.