Canadians will have to wait for interest rates to come down, despite the country heading in the right direction in the battle against inflation, according to Bank of Canada Governor Tiff Macklem.
Mr. Macklem told a Senate committee on May 1 that inflation was 2.9 percent in March – still higher than the target of two percent – and although it’s heading in the right direction, he cautioned against cutting the interest rate too soon. The Bank of Canada’s trend-setting interest rate is currently at 5 percent.
“We don’t want to leave monetary policy this restrictive for longer than we need to, but if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we’ve made bringing inflation down,” he told senators.
Canadians’ concern about interest rates has grown as they see the impact on the cost of borrowing money, from mortgages to business loans.
Mr. Macklem acknowledged that Canadians are looking to the bank for a sign that rates are coming down. “The short answer is we are getting closer. We are seeing what we need to see, we just need to see it for longer, to be confident that progress towards price stability will be sustained.”
Mr. Macklem also cautioned that several factors are keeping inflation above the target rate of 2 percent, including fuel costs. As gasoline prices rise, the Consumer Price Index is likely to remain at around 3 percent in coming months, said Mr. Macklem. “It is then expected to ease below 2.5 percent in the second half of this year, and reach the 2 percent target in 2025,” he said.
Another factor is housing costs.
“Shelter cost inflation is still very high, and remains the biggest contributor to overall inflation,” he said.
There are also positive signs, he said, such as a growing economy, and the bank is forecasting gross domestic product growth of 1.5 percent this year, followed by about 2 percent in 2025 and 2026.
He also said the bank isn’t forecasting a recession and hasn’t “from the beginning.”
Senator Pierrette Ringuette asked Mr. Macklem about the impact of high rates of immigration, saying, “it’s creating a domino effect.”
Mr. Macklem admitted immigration is affecting housing costs. “A critical choke point is housing,“ he said. The housing market was ”already very tight“ and isn’t ”sufficiently flexible to adapt to this rapid rise in immigration. So you’re seeing rent price inflation, running at about 8 per cent. That’s impacting a lot of people.”
He was also asked about the declining productivity of Canada’s economy compared with the United States.
Bank of Canada Senior Deputy Governor Carolyn Rogers said the bank is now talking about productivity because the country is starting to win the battle on inflation.
“We’ve started to think ahead,” she said. “And what we see is a tougher environment to maintain price stability going forward … some of the things that helped us control inflation in the past decade or so are shifting.”
Mr. Macklin admitted that while the economy is growing because of the increasing population, the average Canadian is spending less.
“What you’re seeing is on a per capita basis, consumption growth has been declining, consumption’s been declining,” he said.
She told senators that the bank sees improved productivity as one way to protect the country against challenges like an aging population that buys less and “climate shocks.”
“And we have a much more fragile geopolitical environment that affects commodity prices, that affects supply chains,” she said. “So these are all going to be headwinds to keeping inflation low and stable as we go forward.”
Mr. Macklem said increased productivity is not just economic theory. “Coming out of the pandemic, U.S. productivity has increased, ours has been declining. That gap, which is already too big, has been widening for the last two years, making Canadian companies less competitive against their American counterparts and in turn affecting Canadians’ standard of living.
Ms. Rogers said her speech in March was “a bit of a call to action.”
“The government has to solve this, the private sector has to solve this. You know, this is going to take effort and commitment and change at multiple levels,” she said.
