Tiff Macklem: Opening statement before the Standing Senate
Committee on Banking, Trade and Commerce
Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing
Senate Committee on Banking, Trade and Commerce, Ottawa, Ontario, 27 April 2022.
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Good evening. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss
our recent policy announcement and the Bank of Canada's Monetary Policy Report (MPR).
We published our MPR as Russia's unprovoked invasion of Ukraine entered its eighth week. The
war is causing tremendous human suffering, and our hearts go out to the Ukrainian people. The
war has also injected new uncertainty into the global economic outlook. It is boosting already high
inflation in many countries, including Canada, and it is disrupting the global recovery from the
COVID-19 pandemic.
Against this backdrop we have three main messages.
First, the Canadian economy is strong. Overall, the economy has fully recovered from the
pandemic, and it is now moving into excess demand.
Second, inflation is too high. It is higher than we expected, and it's going to be elevated for longer
than we previously thought.
Third, we need higher interest rates. Our policy interest rate is our primary tool to keep the
economy in balance and bring inflation back to the 2% target. Two weeks ago, we raised our
policy rate by 50 basis points to 1%. And we indicated Canadians should expect further
increases.
Let me expand on each of these three themes.
Canadians have been through a lot in the past two years. Everyone has been touched by the
pandemic, through illness or the loss of loved ones, fear and uncertainty, job loss or business
closure. We experienced the sharpest and deepest recession on record. And repeated waves of
the virus have made the recovery bumpy.
Thanks to exceptional monetary and fiscal stimulus, effective vaccines and a willingness to adapt
and innovate, the economy has bounced back remarkably quickly. It has been the fastest and
sharpest recovery ever. And now demand is beginning to run ahead of the economy's productive
capacity.
The labour market shows this clearly. Before the pandemic, Canada's unemployment rate was
5.7%. When the pandemic hit, it quickly soared to 13.4%. And now, two years later, it is at a
record low 5.3%. Job vacancies are elevated, and wage growth has reached pre-pandemic
levels. Businesses can't find enough workers to meet demand and they are telling us they'll need
to raise wages to attract and retain staff.
We expect strong growth to continue in the months ahead. As remaining public health
restrictions ease, Canadians are spending more on services-travel and recreation, lodging and
restaurants. And we're still buying a lot of goods. Housing activity is still strong, and while we
expect it to moderate, it will remain elevated. Business investment and exports are both picking
up, and higher prices for many of the commodities Canada exports are bringing more income
into the country.
Robust business investment, improved labour productivity and higher immigration should help
boost the economy's productive capacity. And higher interest rates will slow spending. Putting
this all together, the Bank forecasts the Canadian economy will grow 41⁄4% this year, before
moderating to 31⁄4% in 2023 and 21⁄4% in 2024.
That brings me to my second point-the Bank's primary focus is inflation. Consumer price index
(CPI) inflation in Canada hit a three-decade high of 6.7% in March, well above what we projected
in the January MPR. The war has driven up the prices of energy and other commodities, and it is
further disrupting global supply chains. While most of the factors pushing up inflation come from
beyond our borders, with the economy in excess demand, we are facing domestic price
pressures too. About two-thirds of CPI components are growing above 3%, which means
Canadians are feeling inflation across their household budgets, from gas to groceries to rent.
Our latest outlook is for inflation to average almost 6% in the first half of 2022 and remain well
above our 1% to 3% control range throughout this year. We then expect it to ease to about 21⁄2%
in the second half of 2023 before returning to the 2% target in 2024.
High inflation affects everyone. Inflation at 5% for a year-or 3 percentage points above our target
-costs the average Canadian an additional $2000 a year. And it is affecting more vulnerable
members of society the most, both because they spend all their income and because prices of
essential items like food and energy have risen sharply. This broadening in price pressures is a
big concern. It makes it more difficult for Canadians to avoid inflation, no matter how patient or
prudent they are as shoppers.
This brings me to my third point-interest rates are increasing. The economy needs higher rates
and can handle them. With demand starting to run ahead of the economy's capacity, we need
higher rates to bring the economy into balance and cool domestic inflation.
We also need higher interest rates to keep Canadians' expectations of inflation anchored on the
target. We can't control or even influence the prices of most internationally traded goods. But if
Canadians' expectations of inflation stay anchored on the 2% target, inflation in Canada will come
back down when global inflationary pressures from higher oil prices and clogged supply chains
abate.
We are committed to using our policy interest rate to return inflation to target and will do so
forcefully if needed.
Increases in the Bank's policy rate raise the interest rates on business loans, consumer loans
and mortgage loans-and they increase the return on savings. We have been clear that
Canadians should expect a rising path for interest rates, but seeing their mortgage payments and
other borrowing costs increase can be worrying. We will be assessing the impact of higher rates
on the economy carefully.
We recognize everyone wants to know where rates might end up-how high they will need to go.
It is important to remember that we have an inflation target, not an interest rate target. This
means we do not have a pre-set destination for the policy interest rate. But I can say that
Canadians should expect interest rates to continue to rise toward more normal settings. By more
normal we mean within the range we consider for a neutral rate of interest that neither stimulates
nor weighs on the economy. We estimate this rate to be between 2% and 3%. Two weeks ago,
we raised the policy rate to 1%, still well below neutral. This is also below the pre-pandemic
policy rate of 1.75%.
How high rates go will depend on how the economy responds and how the outlook for inflation
evolves. The economy has entered excess demand with considerable momentum and high
inflation, and we are committed to getting inflation back to target. If demand responds quickly to
higher rates and inflationary pressures moderate, it may be appropriate to pause our tightening
once we get closer to the neutral rate and then take stock. On the other hand, we may need to
take rates modestly above neutral for a period to bring demand and supply back into balance and
inflation back to target.
Finally, let me a say a word about our balance sheet. As of this week, we are no longer replacing
maturing Government of Canada bonds with new ones, so our balance sheet will shrink. This
brings our exceptional monetary policy response full circle. When the economy needed
exceptional support in the depth of the recession, we lowered our policy rate to its lower bound
and complemented this with quantitative easing or QE. Last November we ended QE and began
reinvestment. We have now moved to quantitative tightening or QT. With the economy fully
recovered, it is time to normalize our balance sheet. QT will complement increases in our policy
rate by putting upward pressure on longer-term interest rates.
Let me stop here. Senior Deputy Governor Rogers and I will be happy to take your questions.