Interest Rates May Need to Remain High ‘For Longer’ to Tame Inflation: Bank of Canada Governor

Bank of Canada Governor Tiff Macklem holds a press conference in Ottawa on April 12, 2023. The Canadian Press/Sean Kilpatrick

Bank of Canada Governor Tiff Macklem says interest rates may need to stay higher “for longer” in order to return inflation to its 2 percent target.

“When our governing council met last week, we discussed whether we’ve raised rates enough, and we considered the likelihood that the policy rate may need to remain restrictive for longer to return inflation to the 2 percent target,” Macklem told the Standing Senate Committee on Banking, Commerce and the Economy on April 18.

In his opening statement to the committee, Macklem noted that Canada’s annual Consumer Price Index inflation was down to 4.3 percent in March, led by “falling goods price inflation,” and that further declines are expected.

“That’s good news. But many Canadians are still struggling to manage the rising cost of living, and the prices of many things that people need to buy are still rising too quickly,” he said.

“We expect food price inflation to come down in the months ahead, but services price inflation will take longer. Continued strong demand and a tight labour market are putting upward pressure on many services prices, and those are expected to decline only gradually.”

Macklem said the central bank’s governing council had also discussed the risk that services price inflation could remain higher than anticipated in the case of a global recession. He said if global banking stress was to re-emerge, Canada could face “a more severe global slowdown and much lower commodity prices.”

“Overall, we view the risks around our inflation forecast to be roughly balanced, but with inflation still well above our target, we continue to be more concerned about the upside risks,” he said.

Conservative MP Jasraj Singh Hallan asked Macklem if increased spending by the Liberal government would “work against your efforts to address inflation.” Hallan noted that according to the parliamentary budget officer, the new growth spending for Budget 2023 will be $6.7 billion higher than projected in Budget 2023, at $69.7 billion.

Macklem replied that while government spending patterns are “not contributing to the easing of inflationary pressures,” they are not “standing in the way” of getting inflation back to our target.

“In our inflation report, which incorporates those budget projections, we have inflation coming back to target,” he said.

The governor added that the central bank projects inflation will fall to 3 percent by the summer, to 2.5 percent by the end of 2023, and to its target of 2 percent by the end of 2024.

Central Bank Digital Currency

Macklem was also asked by Bloc Quebecois MP Gabriel Ste-Marie about the possibility of creating a Central Bank Digital Currency (CBDC).

In December 2022, Macklem announced Bank of Canada was moving out of its research phase into a central bank digital currency and going into the development phase, with public consultations on the issue to take place in 2023.

Macklem responded, “We will have paper currency for a long time. Canadians like their paper bills.”

He said the bank still had questions about what the benefits would be of a CBDC, how it would impact Canada’s financial system, and how to deal with technical issues that could arise.

“If we do something like that, it’s very important that it works very well, has very high security, and there is widespread access for Canadians. Those are the kinds of questions we’re looking at right now. But it’s still an R&D project. No decision has been made yet,” he said.