Tiff Macklem, the governor of the Bank of Canada declared on Thursday that a surge in interest rates might be on the horizon, considering the probability of inflation remaining high for a while. These remarks were made during his address to the Calgary Chamber of Commerce, a day after the central bank held its bank rate firm at five percent in the wake of growing indications of an economic slump.
Last week, Statistics Canada divulged that the country’s economy shrank in the second quarter concurrently with the unemployment rate, escalating for three consecutive months. Despite these figures, Macklem revealed that the central bank’s governing council has concurred on the possible need to increase the rates once again.
According to Macklem, an endeavour to navigate a middle path amidst the risks of under-tightening and over-tightening compelled the governing council’s verdict to keep the policy rate at five percent and the stage set for potential future hikes if inflationary impetus lingers.
As of July, the inflation rate of Canada was 3.3 percent. However, a prediction by the Bank of Canada envisages an inflation flare-up in the subsequent months, followed by a drop. Amid discussions surrounding the central bank’s political autonomy in the face of comments from elected officials about its policy decisions, Macklem endured queries during a news conference on Thursday.
Wednesday saw Finance Minister Chrystia Freeland receiving flak for seemingly lauding the central bank’s unchanged key rate decision, terming it as “welcome relief for Canadians”. The NDP extended their criticism, suggesting Freeland to coax the Bank of Canada to cease raising interest rates.
Macklem underscored that high inflation and ascendant interest rates, as experienced by both elected officials and the central bank, are sources of profound concern for citizens. He, however, refrained from speculating on any potential directive to the central bank regarding interest rates from the finance minister, an unprecedented eventuality yet within the authorities of the minister.
He expressed confidence in the staunch adherence to the Bank of Canada’s independence by deputy prime minister. Macklem also emphasised on the significance of achieving a two percent inflation rate to maintain economic predictability and stability.
Macklem admitted that the decelerating progress in reducing inflation suggests either additional time needed for previous rate hikes to manifest their impacts or simply, that interest rates are not optimally high yet.
Despite a striving pursuit for evidence of not only a decreasing inflation but also less frequent large price increases across the economy, Macklem stated that to materialise these, a continuous slowdown of economic demand remains essential.
Nevertheless, he clarified that curtailing economic growth is not on the central bank’s agenda. The ideal way for the bank to buttress the economy, according to Macklem, is through ensuring a pull back of inflation to the targeted two percent.
On being questioned about the possibility of a recession in Canada, Macklem negated the assertion. He allowed for the prospect of witnessing two slightly negative quarters of growth, technically a recession, but underscored that such minor negatives do not correspond with the conventional conception of recession which entails a major reduction in output and a substantial rise in unemployment.