Bank of Canada Made Poor Prediction on End-of-Year Inflation Level, Governor Says

Bank of Canada Governor Tiff Macklem gestures during a press conference at the Bank of Canada in Ottawa, on Oct. 26, 2022. The Canadian Press/Sean Kilpatrick

The Bank of Canada made a poor prediction on what Canada’s inflation level would be at the end of 2022, said the bank’s governor, Tiff Macklem. He had previously said he expected the national inflation level to be around 2 percent by the year’s end.

“That’s a very big forecast error,” Macklem told the Globe and Mail in a year-end interview on Dec. 16.

As of October, Canada’s inflation level sat at 6.9 percent—almost five points higher than Macklem predicted it would be by the end of December.

“So, yes, we have some explaining to do,” Macklem said.

“If we’d known that there wasn’t going to be another [COVID] wave, and that the economy would reopen rapidly, and that households would come very rapidly back into the market and try to catch up and buy so many of the services that they hadn’t been able to enjoy for the last couple of years—yes, I think if we could have foreseen that, we would have started to raise interest rates earlier.”

The central bank raised interest rates by 50 basis points (or half a percentage point) on Dec. 7, bringing the key rate up to 4.25 percent. The key rate is a tool used the Bank of Canada to implement monetary policy. Increasing the rate is used to slow down inflation and protect the currency.

Macklem earlier told the House of Commons finance committee that he believes large amounts of federal spending during the pandemic contributed to today’s high inflation rate, which has come down from being over 8 percent in June.

“I think we should have started tightening interest rates sooner,” Macklem told the committee on Nov. 23.

In his year-end interview, Macklem said the bank underestimated the stretch that would come between low supply and high demand for goods across the country, which caused ordinarily low prices to inflate. “What we didn’t see is just how many of these things there would be,” he said.

Inflation Predictions for 2023

Macklem told the Commons finance committee on Nov. 23 that he now believes inflation will reach between 2 and 3 percent by the end of next year.

“The economy is slowing. We anticipate that growth will be about zero for three quarters,” he said, adding that “the second part of the year in 2023 will be a return to growth.”

“[Inflation] will stay quite high for the rest of this year [but] will start to decline next year,” he said, predicting it will fall to 3 percent by the end of 2023 before eventually reaching 2 percent.

“It will take time. What we’re seeing is that monetary policy is starting to have an impact.”

The bank’s Deputy Governor Sharon Kozicki said during a press conference in Montreal on Dec. 8 that the central bank is now beginning to see the effects of its increased interest rates on inflation.

“We’re very interested in seeing again how the economy responds and continues to respond to the actions we have taken,” Kozicki said. “We are moving from how much to raise interest rates to whether to raise interest rates.”

The Bank said in a statement on Dec. 7 that its Governing Council will decide going forward whether or not interest rates need to rise further “to bring supply and demand back into balance and return inflation to target.”