‘Still too early’ to cut rates, Bank of Canada’s Macklem says

The head of the Bank of Canada is pushing back on expectations for interest rate cuts, despite calls from the market and central bank counterparts south of the border that tightening could reverse in the new year.

Governor Tiff Macklem said in a year-end speech to the Canadian Club in Toronto on Friday that “it’s still too early to consider cutting our policy rate.”

Macklem said that the Canadian economy is “no longer overheated,” which is “relieving inflationary pressures.”

Canada’s top monetary policymaker added that while he expects “gradual declines” in inflation amid weak economic growth in 2024, there are still risks for the Bank of Canada to consider. He cited dangers that conflicts in the Middle East and Europe could escalate as one such risk.

“When it’s clear that inflation is on a sustained downward track, we can begin discussing lowering our policy interest rate,” Macklem said. “We don’t need to wait until inflation is all the way back to the two per cent target to consider easing policy, but it does need to be clearly headed to two per cent.”

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Macklem warned that interest rate hikes to date will continue to work their way through the economy in 2024, “limiting growth and employment.” He said the next few quarters will likely be “difficult for many” Canadians as higher borrowing costs squeeze their budgets.

“Unfortunately, this is what’s needed to take the remaining steam out of inflation,” Macklem said.

The national inflation rate eased to 3.1 per cent in October. The final inflation reading for the year will come Dec. 19, with some early forecasts predicting a further cooling in November.

The Bank of Canada held its benchmark interest rate at 5.0 per cent in the third consecutive decision earlier this month. Despite warnings from the central bank that rates could rise higher still, market watchers have begun pencilling in rate cuts for as early as the second quarter of 2024.

Money markets expect the bank to begin easing as soon as April and for rates to fall 125 basis points in 2024.

The U.S. Federal Reserve also held interest rates steady this week, signalling at the time that it expects three interest rate cuts next year.

“The Fed’s going to do what they need to do, we’re going to focus on what needs to be done here in Canada,” Macklem said Friday in distinguishing his approach to that of Fed Chair Jerome Powell.

Royce Mendes, head of macro strategy at Desjardins Group, noted the Bank of Canada would not release its updated economic forecasts until Jan 24.

“It’s likely Canadian policymakers will wait until then to make any major changes in communications. We’re, therefore, not too surprised Macklem isn’t moving in lockstep with Powell,” he said in a note.

The European Central Bank this week said policy easing was not even brought up in a two-day meeting, the Bank of England said rates would remain high for “an extended period.”

Macklem meanwhile said Friday that he would hold press conferences after every interest rate decision in 2024 as part of a bid to better communicate the Bank of Canada’s moves to Canadians.

Interest rate decisions will also be published 15 minutes earlier next year, coming at 9:45 a.m. ET.

— with files from Reuters

3:40 Bank of Canada holds key interest rate steady at 5%