Opening Statement by Tiff Macklem
Governor of the Bank of Canada
Press conference following the release of the
Monetary Policy Report
July 13, 2022
Ottawa, Ontario
I'm pleased to be here with
Good morning. Senior Deputy Governor Carolyn
today's policy announcement and the Bank's Monetary Policy
Rogers to discuss
Report (MPR).
Today, we raised the policy interest rate by 100 basis points, or 1%. An increase of
this magnitude at one meeting is very unusual. It reflects very unusual economic
circumstances: inflation is nearly 8%-a level not seen in nearly 40 years.
I want to explain to Canadians why we've
made this decision. There were three
key considerations.
First, inflation is too high, and more people are getting more worried that high
inflation is here to stay. We cannot let that happen. Restoring price stability-low,
stable and predictable inflation-is paramount.
Second, the Canadian economy is overheated. There are shortages of workers
and of many goods and services. Demand needs to slow so supply can catch up
and price pressures ease.
And third, our goal is to get inflation back to its 2% target with a soft landing for the
economy. To accomplish that, we are increasing our policy interest rate quickly to
prevent high inflation from becoming entrenched. If it does, it will be more painful
for the economy-and for Canadians-to get inflation back down.
With these important considerations in mind, the Governing Council decided to
front-load the path to higher interest rates today. This is our fourth consecutive
interest rate increase since March.
We know that higher interest rates will add to the difficulties that Canadians are
already facing with high inflation. But the strain of higher interest rates in the short
term will bring inflation down for the long term. It will get us to the other side of this
difficult period and back to normal.
Things are not normal right now. After 30 years of low, stable inflation, many
Canadians are experiencing the pain of high inflation-and the uncertainty that
comes with it-for the first time. Over half of the components in the consumer price
index (CPI) basket are rising above 5%. When inflation is this high, it erodes the
purchasing power of every Canadian.
The drivers of inflation are the same in Canada as in most countries. The war in
Ukraine and continued supply chain disruptions have boosted inflation in Canada
and around the world. But what started as global inflation driven by higher global
energy and goods prices is broadening here at home.
Inflation is broadening because the Canadian economy is in excess demand.
There aren't enough goods and services to meet the demand we're seeing as
can't find enough workers
people enjoy a fully reopened economy. Employers and
they're
increasing wages to attract and retain staff. With households spending
robustly, businesses are passing on higher input and labour costs by raising prices.
Higher interest rates will help slow demand and allow supply time to catch up.
Consumer spending will moderate as the pent-up demand from pandemic
restrictions eases and the cost of borrowing increases. Housing market activity is
already cooling rapidly from unsustainably high levels during the pandemic. And
slower global growth will reduce demand for our exports.
Taking all of this into account, we are forecasting annual growth in economic
activity will be around 31⁄2% this year, 13⁄4% next year and 21⁄2% in 2024. As global
bottlenecks gradually resolve and tighter monetary policy works its way through the
economy, inflation will start to come down. While we may see a few more months
with CPI inflation around 8%, we expect it to decline later this year, ease to about
3% by the end of next year and return to the 2% target by the end of 2024.
This is the soft landing we are projecting. Interest rate increases can cool demand
and inflation without choking off growth or causing a surge in unemployment. Some
sectors will be more affected by interest rate increases than others, but the very
tight labour market means there is room to reduce the number of job vacancies
without having a big impact on overall employment. And with the prices of many of
the commodities we export expected to remain elevated, the global forces slowing
growth will not affect Canada as much as many other countries.
But the path to this soft landing has narrowed because elevated inflation is proving
more persistent. And this requires stronger action now so consumers and
businesses can be confident that inflation will return to its 2% target.
Our decision today takes the policy interest rate to 21⁄2%. That puts it in the
longrun neutral range that neither stimulates nor restricts growth. We estimate that
range to be between 2% and 3%. We continue to expect that interest rates will
need to rise further to cool demand and achieve the inflation target. How high our
policy rate needs to go will depend on how the economy and inflation evolves.
By front-loading interest rate increases now, we are trying to avoid the need for
even higher interest rates down the road. Front-loaded tightening cycles tend to be
followed by softer landings. This argues for getting our policy rate quickly to the top
end or slightly above the neutral range.
Before I turn to your questions, let me say a few words about the Governing
Council's policy discussions.
We noted that major global events, including the war in Ukraine and severe
COVID-19 restrictions in China, have not abated and are putting upward pressure
on inflation and dampening global growth. And we recognized that the resolution of
global supply disruptions remains difficult to predict.
We discussed the momentum in domestic demand and how it is becoming a more
prominent driver of inflation in Canada. A wide range of labour market indicators,
including the record-low unemployment rate, widespread labour shortages and
higher wage growth, all point to an economy that is overheated.
We also reviewed measures of inflation expectations at some length. The
prevailing view in consumer and business surveys is that the Bank of Canada will
ultimately control inflation. At the same time, these surveys clearly suggest inflation
expectations have moved up and are becoming more dispersed, with more
respondents now seeing high inflation persisting. Market-based measures of
inflation expectations over the next two years as well as the projections of
professional forecasters have also risen, though they remain consistent with the
2% inflation target over the longer term. While the Governing Council was
reassured that the inflation target remains credible overall, we recognized this
credibility is being tested. Demand in the economy is running ahead of supply,
inflation is high, and uncertainty about future inflation has increased.
All of that led us to the decision we took today to accelerate the path to higher
interest rates. We did not take this decision lightly. We are acutely aware that
higher interest rates will affect Canadians who are already feeling the pain of high
inflation. It can seem counterintuitive to add to the interest costs Canadians face in
order to combat the cost of inflation. But by increasing the cost of borrowing we will
moderate spending and return inflation to target. We need to get price changes
back to normal. This matters because it gives people predictability-to plan their
spending and savings decisions, to budget, to live their lives without having to
worry about what things are going to cost next week, next month or next year.
our
The way to protect people from high inflation is to eliminate it. That's job, and
we are determined to do it. The Governing Council is resolute in its commitment to
price stability.
With that, let me stop and turn to you for questions.