Tiff Macklem: Economic growth during uncertain times
Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Institute of
International Finance (IIF) and the Canadian Bankers Association (CBA) Forum,
Toronto, Ontario, 24 September 2024.
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Good afternoon. I want to thank the Institute of International Finance and the Canadian
Bankers Association for inviting me to take part in your 2024 Forum.
Your focus on growth during uncertainty is timely. Uncertainty feels like the new reality:
The uncertainty caused by war in Europe and in the Middle East. The uncertainties
arising from geopolitical tensions and economic fragmentation. And the related
uncertainties about supply chains, trading relationships and global investment risks.
Rapid advances in new technologies, particularly artificial intelligence (AI) and its new
offspring, Generative-AI, are disrupting business models and creating new uncertainties
for firms and workers.
Uncertainty surrounds the impacts of climate change and the policy frameworks to
adapt to and mitigate it.
There is political uncertainty. And fiscal uncertainty.
As your theme implies, uncertainty and economic growth do not sit well together:
uncertainty impedes growth.
But with inspired policy, good business decisions and sound risk management, we can
manage uncertainty and reduce its impact on households, businesses and growth. We
have recent historical evidence.
Sixteen years ago this month, Lehman Brothers failed, and the financial system froze
because nobody knew which banks were safe. Today, the global financial system is
much safer thanks to the implementation of sweeping global reforms to increase capital
and liquidity buffers, and reduce leverage.
With the rapid development of new vaccines and with exceptional fiscal and monetary
policies, uncertainty about our health and the health of our economies has decreased
dramatically since the depths of the COVID-19 pandemic.
Thanks to decisive monetary policy action and the unblocking of supply chains,
uncertainty about costs and inflation are much lower today than two years ago, when
inflation peaked above 8% in Canada and was even higher in many other countries.
In the past few weeks, I have given speeches on the shifting global trade landscape
and the economic implications and risks of rapid advances in artificial intelligence.
These are two key areas where we can reduce uncertainty through good policy and
farsighted business leadership.
At the same time, we need to recognize that new uncertainties are a new reality, and
we must be ready for the inevitable shocks in a more turbulent world. That puts a
priority on risk management and investments in resilience.
A key function of financial institutions is to help households and businesses manage the
risks they face. Financial institutions also have a responsibility to manage their own
risks prudently so that they do not themselves become a source of uncertainty and
instability.
As Canada's central bank, we have a role to play in mitigating and managing risks and
uncertainty. Our primary mandate is price stability-in other words, low, stable and
predictable inflation. We also have mandates to foster a stable financial system and
ensure safe and efficient payments.
Let me say a few words on financial stability and payments. And then I'll finish with
some thoughts on monetary policy.
Our financial stability focus is on risks that could lead to system-wide stress. And we
publish these findings in our annual Financial Stability Report (FSR).1
In our most recent FSR, published in May, we reported that Canadian mortgage holders
had experienced a modest increase in levels of financial stress. Since then, we've
observed that arrears on mortgages have continued to rise, although they remain below
pre-pandemic levels. It also appears that these households have not leaned on
revolving credit products such as lines of credit and credit cards to a greater degree
than before the pandemic.
But there is a notable increase in financial stress among borrowers without a mortgage,
mainly renters. During the pandemic, for most credit products, the share of these
borrowers missing payments reached historical lows. However, we're now seeing a
larger share of these borrowers lagging behind on credit card and auto loan payments.
Over the past year the share of borrowers without a mortgage who carry a credit card
balance of at least 90% of their credit limit has continued to climb. And this share is now
above typical historical levels. This is concerning.
Our responsibilities related to payments require us to adapt to increasing digitalization.
Innovation in payments continues to accelerate.
In 2021, the Bank assumed a new mandate for the supervision of retail payment service
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providers. Starting November 1 of this year, more than 3,000 service providers will
need to register with the Bank and follow new rules aimed at safeguarding consumers
and protecting the integrity of retail payments.
We are also looking at the bigger picture of payment innovation, both in Canada and
around the world. As part of this work, in the past few years we've built an extensive
body of knowledge about the framework and technology behind a possible central bank
digital currency (CBDC), including the benefits and risks.
But recognizing that there is not currently a compelling case to move forward with a
CBDC in Canada, the Bank is scaling down its work on a retail central bank digital
currency and shifting its focus to broader payments system research and policy
development. The Bank will continue to monitor global retail CBDC developments. And
the Bank will be ready to ensure Canadians always have a safe and secure supply of
public money.
Now, let me circle back to monetary policy.
In June, we began lowering our policy interest rate. We cut the policy rate at our last
three decisions, for a cumulative decline of 75 basis points to 4.25%.
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Our most recent decision on September 4 reflected two main considerations.
First, we noted that headline and core inflation had continued to ease as expected.
Second, we said that as inflation gets closer to target, we want to see economic growth
pick up to absorb the slack in the economy.
Since then, we've been pleased to see inflation come all the way back to the 2% target.
It has been a long journey. Now we want to keep inflation close to the centre of the 1%
-3% inflation-control band. We need to stick the landing.
What does this mean for interest rates? With the continued progress we've seen on
inflation, it is reasonable to expect further cuts in our policy rate. The timing and pace
will be determined by incoming data and our assessment of what those data mean for
future inflation.
As always, we try to be as clear as we can about what we are watching as we chart the
course for monetary policy.
Economic growth picked up in the first half of this year, and we want to see it strengthen
further so that inflation stays close to the 2% target. Some recent indicators suggest
growth may not be as strong as we expected. We will be closely watching consumer
spending, as well as business hiring and investment.
We will also be looking for continued easing in core inflation, which is still a little above
2%. Shelter cost inflation remains elevated but has started to come down, and we are
looking for it to moderate further.
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Our next decision is October 23 . And we will have a revised economic outlook at that
time.
With those introductory thoughts, let's get the discussion started.
I would like to thank Russell Barnett, Claudia Godbout and Brian Peterson for their help
in preparing these remarks.
1
Financial Stability Report-2024 - Bank of Canada