‘Excess demand’ fuelling inflation is now gone, Bank of Canada’s Macklem says

The head of the Bank of Canada says the “excess demand” that was fuelling inflation is gone from the economy.

Tiff Macklem’s comments on Wednesday at the Saint John Region Chamber of Commerce in New Brunswick come a day after Statistics Canada reported the annual pace of inflation slowed sharply to 3.1 per cent in October. That’s down from 3.8 per cent the month earlier and five percentage points lower than the peaks seen in June 2022.

The Bank of Canada raised its benchmark interest rate rapidly since March 2022 in an attempt to cool the economy and dampen demand for spending — efforts that Macklem said are expected to continue pushing inflation down in the months to come.

“We expect the economy to remain weak for the next few quarters, which means more downward pressure on inflation is in the pipeline,” he told the crowd. “In short, the excess demand in the economy that made it too easy to raise prices is now gone.”

Macklem acknowledged in his speech that despite slowing inflation, higher interest rates are “squeezing” Canadians. But he argued that “the payoff will be worth it” when the Bank of Canada achieves price stability and inflation returns to the two per cent target.

Macklem said interest rates “may now be restrictive enough” to tame price pressures, but reiterated that the central bank is prepared to raise rates again if high inflation “persists.”

The central bank has held its policy rate steady in two consecutive decisions. The Bank of Canada’s final rate decision of the year comes on Dec. 6.

As for when the central bank’s policy rate could start to fall, Macklem said in a question and answer session after his speech that the Bank of Canada is watching trends of underlying inflation carefully.

While core inflation ticked down in October after a long stretch of little movement, Macklem cautioned that “one month is not a trend.”

“We need to see a number of months of clear evidence that we’re on the path to two per cent inflation,” he told the crowd, reiterating that it’s too soon to be considering rate cuts.

The Liberal government’s fall economic statement on Tuesday predicted that  Canada will avoid a recession amid slowing growth.

Heading into that fiscal update, Macklem had warned that the current pace of aggregate government spending was above levels consistent with getting inflation back down to two per cent.

Ottawa’s fall update added $20.8 billion in spending over five years, but the bulk of that funding is allocated to housing projects beginning in the 2025/26 fiscal year.

The Liberals are also aiming to maintain the current fiscal year’s deficit at or below the spring budget projection of $40.1 billion and lower the debt-to-GDP ratio in 2024-25 relative to the projection in the fall economic statement.

Macklem said Wednesday that keep spending over the next two years “essentially unchanged” will be “helpful” as the Bank of Canada works to get inflation down. He said new spending past that point, as well as any updates from provincial governments, will be baked into the central bank’s forecasts moving forward.

The update also introduced new fiscal guardrails tied to keeping the federal deficit below one per cent of real gross domestic product.

“From the perspective of monetary policy, I do think that’s helpful,” Macklem said of the new benchmarks.

— with files from The Canadian Press