Bank of Canada Governor Tiff Macklem said more rate hikes are needed to bring down inflation, despite some early signs that the economy is slowing.
Speaking before the Halifax Chamber of Commerce on Thursday, Macklem said high inflation is increasingly reflecting price pressures in the country.
The governor said while global events such as the pandemic and Russia’s invasion of Ukraine caused prices to soar, demand is outstripping supply more broadly in the Canadian economy.
In hindsight, the bank’s initial assessment that high inflation was temporary was “too optimistic,” Macklem said.
As the economy fully reopens in the spring, pent-up demand for services in sectors such as travel and entertainment begins to drive inflation even higher, he said.
“Canadians have experienced these pressures from the very beginning when trying to book camping or book a table at their favorite restaurant,” Macklem said, according to prepared text in his speech. Released in Ottawa.
After inflation hit an annual rate of 8.1% in June, the rate of price growth in Canada has slowed, largely due to falling gas prices. In August, the annual inflation rate was 7.0%.
However, Macklem said core measures of inflation “have not fallen meaningfully” even as headline inflation has eased.
As the Bank of Canada tracks inflation and the effects of higher interest rates, the governor said it will keep an eye on inflation fundamentals, which tend to be less volatile than the rate of inflation. common broadcast.
Macklem said there are some signs that global inflationary forces are easing and that food inflation will soon begin to ease.
However, despite falling commodity prices and a loosening of global supply chains, these developments have not been enough to dampen inflation, he said.
With the labor market still tight, the economy still “over-demand” and inflation still too high, Macklem thinks more rate hikes will be necessary.
The central bank has been monitoring inflation expectations of people and businesses for fear that inflation could become “entrenched”. High inflation expectations can lead to businesses setting even higher future prices and workers demanding higher wages in future wage contracts.
To keep inflation expectations in check, “Canadians will need to see a clear drop in inflation,” Macklem said.
“Put simply, there is more work to be done,” he said.
The Bank of Canada will make its next interest rate announcement on October 26. Since March, the central bank has increased its base rate from 0.25% to 3.25%, one of a series of cycles. the fastest rate hike in the bank’s history.
The housing market has cooled significantly due to higher borrowing costs. Economic growth also slowed as the economy had three consecutive months of job losses. However, a rate hike to take full effect will take time to have an impact on the economy.
Macklem said high inflation harms people and businesses by creating “uncertainty and unfairness” while distorting decision-making and undermining trust.
The governor said the bank was “firmly” in its commitment to restoring price stability in Canada.
This Canadian Press report was first published on October 6, 2022.