Higher interest rates are ‘painful’ but ‘worth it’: Bank of Canada’s Macklem

The head of the Bank of Canada says the central bank’s two per cent inflation target is “now in sight” but cautions that persistent price pressures might require additional interest rate hikes.

Tiff Macklem made his remarks to the Calgary Chamber of Commerce on Thursday, one day after the central bank opted to hold its benchmark interest rate steady for just the third time this year.

According to a prepared copy of his speech, Macklem told the assembled business leaders that the Bank of Canada’s efforts to tame inflation with restrictive monetary policy were bearing fruits, but the central bank’s governing council is growing concerned that momentum in the inflation fight has stalled.

“Our two per cent target is now in sight,” Macklem said.

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“But we are not there yet and we are concerned progress has slowed. Monetary policy still has work to do to restore price stability for Canadians, and we are committed to staying the course.”

The Bank of Canada governor also acknowledged to the crowd that the path back to the two per cent target is difficult. He noted that much of the current fuel for Canada’s annual inflation rate is the increase in mortgage costs tied to the bank’s own rate hikes, but argued that without tighter monetary policy, “inflation throughout the economy would be a much bigger problem for everyone.”

“Higher interest rates are painful. But getting to the two per cent target is worth it,” Macklem said.

1:10 Higher interest rates are ‘painful’ but ‘worth it’: Macklem

Speaking to reporters later in the day, Macklem also reaffirmed the Bank of Canada’s independence amid recent political commentary surrounding the central bank’s rate decisions.

Annual inflation ticked up to 3.3 per cent in July, half a percentage point higher than the previous month.

Macklem said it’s possible that monetary policy might be “sufficiently restrictive to restore price stability,” but warned that waning downward momentum in underlying inflation pressures could leave annual price increases stuck above two per cent.

While he reiterated that the Bank of Canada is prepared to raise interest rates higher if necessary, he said that the central bank doesn’t want to overtighten monetary policy, either.

“We know higher interest rates are hitting some Canadians hard, and we don’t want this to be any harder than necessary. But letting too-high inflation persist would be worse,” he said.

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Macklem also defended the Bank’s two per cent target itself amid criticisms that the central bank ought to ease up on its tightening cycle to allow inflation to sit around the three per cent mark.

He said that two per cent inflation is not just an arbitrary benchmark; he defended the target as providing predictability for Canadians and businesses for decades, and argued that inflation’s swings could become more “volatile” without it.

“The bottom line is the two per cent target is eminently achievable and has served Canadians well,” Macklem said.

“We are confident that two per cent is the right target. … We need to stay the course.”

The Bank of Canada said in its latest forecasts in July that it expects inflation to return to two percent by mid-2025.

Signs of slowing growth, including the economy shrinking slightly in the second quarter of the year, have given the Bank of Canada enough confidence that it can wait to see if inflationary pressures will abate, Macklem said.

He said in his speech that the central bank is not trying to “kill economic growth,” but is looking for a period of “slower growth” to relieve price pressures. He added in response to questions from the room in Calgary afterwards that the Bank of Canada is “not projecting a serious downturn.”

Speaking to reporters after his speech in Calgary, Macklem said that he does not think Canada is currently in a recession. He reiterated that the Bank of Canada is calling for a periods of “low, positive growth” in the months to come, which could come with a few periods of negative growth in the economy instead.

While two quarters in a row of negative growth might mark a “technical recession” for some observers, Macklem said it would not likely be “what most people think of (as) a recession.”

Macklem said that Canada’s labour market is “healthy” and the unemployment rate remains too low to constitute such a steep downturn at this juncture.

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He highlighted that while the Bank is observing more softness in the labour market as job vacancies decline and the unemployment rate steadily rises, wage growth “has yet to show clear signs of moderation” as it holds between four and five per cent.

The Bank expects wage growth will slow in the months ahead, and will continue to watch those metrics as well as corporate pricing, inflation expectations and underlying price pressures in determining whether rates will in fact have to rise again.

The Bank of Canada’s next interest rate decision will come on Oct. 25, alongside the central bank’s updated economic forecasts in its Monetary Policy Report.