Tiff Macklem: Opening statement - Standing Senate Committee on
Banking, Trade and Economy
Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms
Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, before the Standing
Senate Committee on Banking, Trade and the Economy, Ottawa, Ontario, 1 November
2022.
* * *
Good evening. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to
Monetary Policy
discuss our recent policy announcement and the Bank of Canada's
Report (MPR).
Last week, we raised the policy interest rate by 50 basis points to 3.75%. This is the
sixth consecutive increase since March. Quantitative tightening continues and is
complementing increases in the policy rate. We also expect our policy rate will need to
rise further. How much further will depend on how monetary policy is working to slow
demand, how supply challenges are resolving and how inflation and inflation
expectations are responding to this tightening cycle.
Our decision last week reflected several considerations.
First, inflation in Canada remains high and broad-based, reflecting large increases in
both goods and services prices. Inflation has come down in recent months, but we have
yet to see a generalized decline in price pressures. About two-thirds of the components
of the consumer price index (CPI) have risen by more than 5% over the last year. And
rising prices for essentials like groceries and rent are hitting lower-income Canadians
particularly hard.
Second, and related, the economy is still in excess demand-it's overheated. Job
vacancies have declined from their peak but remain high, and businesses continue to
report widespread labour shortages. With the economy now fully reopened, households
want to enjoy many of the close-contact services they have missed, but businesses
can't keep up, and we have seen prices for services rise rapidly.
Third, higher interest rates are beginning to weigh on growth. This is increasingly
evident in interest-rate-sensitive parts of the economy, like housing and spending on
big-ticket items. But the effects of higher rates will take time to spread through the
economy.
Fourth, there are no easy outs to restoring price stability. We need the economy to slow
down to rebalance demand and supply and relieve price pressures. We expect growth
will stall in the next few quarters-in other words, growth will be close to zero. But once
we get through this slowdown, growth will pick up, our economy will grow solidly, and
the benefits of low and predictable inflation will be restored.
To put this in numbers, growth in gross domestic product (GDP) is projected to decline
from about 31⁄4% this year to just under 1% next year and then rise to 2% in 2024. And
inflation is expected to hover around 7% in the final quarter of this year, fall to around
3% by the end of next year and return to the 2% target by the end of 2024.
Finally, we are trying to balance the risks of under- and over-tightening.
If we don't do enough, Canadians will continue to endure the hardship of high inflation.
And they will come to expect persistently high inflation, which will require much higher
interest rates and, potentially, a severe recession to control inflation. Nobody wants that.
If we do too much, we could slow the economy more than needed. And we know that
has harmful consequences for people's ability to service their debts, for their jobs and
for their businesses.
This tightening phase will draw to a close. We are getting closer, but we are not there
yet.
The Bank of Canada's job is to ensure inflation is low, stable and predictable. We are
still far from that goal. We view the risks around our forecast for inflation to be
reasonably balanced. But with inflation so far above our target, we are particularly
concerned about the upside risks.
We are mindful that adjusting to higher interest rates is difficult for many Canadians.
Many households have significant debt loads, and higher interest rates add to their
burden. We don't want this transition to be more difficult than it has to be. But higher
interest rates in the short term will bring inflation down in the long term. Canadians are
looking for ways to protect themselves from rising prices, and we are working to protect
them from entrenched inflation. It will take time to get back to solid growth with low
inflation. But we will get there. By working through this difficult phase, we will get back
to price stability with sustained economic growth, which benefits everyone.
With that summary, Senior Deputy Governor Rogers and I are now pleased to take your
questions.