A potential increase in interest rates from the Bank of Canada has been suggested by the bank’s governor, Tiff Macklem, should inflation remain elevated in the foreseeable future. This pronouncement was made during his address to the Calgary Chamber of Commerce, a day after the central bank maintained its key interest rate at five per cent amidst an indicative economic slowdown.
Recent findings from Statistics Canada revealed a decline in the economy in the second quarter, accompanied by a continuous rise in the unemployment rate over the last three months.
Meanwhile, Macklem noted that the central bank’s governing council is in agreement that a further hike in rates might be necessary.
“In our efforts to mitigate the risks of over-tightening and under-tightening, the governing council has settled on maintaining the policy rate at five per cent, and concedes the potential need for an increase should inflationary pressures persist,” said Macklem.
As of July, Canada’s inflation rate stood at 3.3 per cent. However, the Bank of Canada anticipates a surge in inflation in the following months before it begins to recede.
During a press conference on Thursday, Macklem addressed queries regarding the central bank’s political autonomy, in light of remarks made by politicians in reference to its policy decisions.
He highlighted that elected representatives are receiving feedback from their constituents concerning the detrimental effects of high inflation and soaring interest rates, a sentiment echoed within the central bank. Regarding speculation about potential political directives on interest rates—an unprecedented occurrence in the bank’s history, Macklem remained tight-lipped.
Addressing the Bank of Canada’s objective to rein in inflation to two per cent, Macklem spent substantial time in his speech ensuring the credibility of the inflation target. Even though inflation might appear close to this target, achieving it is fundamental for preserving predictability and stability in the economy, he emphasised.
The bank’s governor implied that if progress in reducing inflation continues to slow, it could mean that either the previous rate hikes need more time to take effect, or that current interest rates still aren’t high enough.
According to Macklem, further confirmation that inflation is decreasing and that large price increases are becoming rarer across the economy is still required. In order for this to occur, he reiterated the necessity for ongoing economic deceleration.
However, Macklem was clear in stating that the central bank isn’t aiming to obliterate economic growth, instead emphasising the critical role of ensuring inflation returns to the two per cent target in the bank’s economic support.
Despite questioning whether Canada is in the midst of a recession, Macklem’s response was negative. He did note, however, that the country might witness two consecutive quarters of mild negative growth, which technically constitutes a recession.
“But a couple of very small negatives aren’t reflective of a traditional recession, with its hallmark characteristics of significant output contraction and a steep rise in unemployment,” he added.