Bank of Canada’s Macklem on inflation, interest rates, and recession risk
Governor of the Bank of Canada Tiff Macklem says he thinks Canada is “turning the corner” on inflation, but he isn’t ruling out that the country could enter a “mild recession.”
“Our own forecast has growth slowing. It is going to feel painful,” Macklem said in an English-language broadcast exclusive interview with CTV National News Ottawa Bureau Chief Joyce Napier on Wednesday.
“We’re not predicting a recession, we’re predicting roughly zero growth for the next two or three quarters. But, look with roughly zero growth, we could get two or three quarters of slightly negative growth. So we can’t rule out a mild recession.”
Macklem said that while the Bank isn’t predicting a “major contraction” that would result in large increases in unemployment, he’s encouraging Canadians to “try to accumulate their buffers” to ensure they can withstand “tougher times.”
His remarks come on the heels of announcing the Bank’s eight consecutive rate hike since March 2022— raising its overnight rate by 25 basis points, moving its policy rate to 4.5 per cent from 4.25 per cent—in an effort to tamp down inflation.
With Wednesday’s announcement, Macklem also signalled a pause at its current rate, while it assesses the full impact of its hikes on the economy.
In the interview, Macklem said that he thinks the Bank has now “done enough” and isn’t planning to raise rates further, however if the economy doesn’t evolve as Canada’s central bank is currently forecasting—three per cent inflation by mid-2023— it may need to raise rates again.
Seeking to defend his handling of inflation, Macklem said that had the Bank moved more slowly, the Bank would still be in a position of having to raise rates further.
“Look, I’m not saying we got everything exactly right,” he said. “And with the benefit of hindsight, we could have done some things better. But I think when you step back, it’s actually worked out reasonably well. It could have been a lot worse.”
Still, with what widely is anticipated to be challenging economic times ahead, Macklem said that it will be “well into the future” before Canadians will feel the relief that comes with cutting interest rates.
“Once we get inflation down, we can resume sustainable growth and things can get back to normal, but inflation is not going to fade away by itself,” he said.
Below is a full transcript of CTV News’ interview with Tiff Macklem, it has been edited for clarity.
Joyce Napier: You signalled today that there would be a pause in your rake heights, and I want to ask you: is the worst over and, you know, has inflation peaked? Is that what’s going on?
Tiff Macklem: “Joyce, inflation is still too high, but it is cooling. And we do think we’ve turned the corner or we’re turning the corner on inflation. And we’ve done a lot at the Bank of Canada. We’ve raised our policy rate more than four percentage points over the last year. It’s now time to take a pause and see if we’ve done enough.”
Napier: So you know, after eight unprecedented hikes in what 10 months, you’re pressing pause. You say it’s a conditional pause… You say you need to give time to the economy to feel sort of the effects of all these hikes that you have. So give us a timeline… how much will this pause last? And does that mean that there will be no more hikes?
Macklem: “So I’d love to put it on a calendar for you, but really, it’s going to depend on how the economy evolves. And what we’re saying is that if the economy evolves broadly in line with the forecast that we published today, we think we’ve done enough. We don’t think we need to raise rates further. But, if inflation doesn’t come down in line with our forecast—if comes down a bit but gets stuck— yes, we may have to do more.”
Napier: But it is coming down. It’s gone from 8.1 per cent to 6.3 per cent. So it is coming down, is it that it’s not fast enough for you?
Macklem: “It is coming down and we think it’s going to continue to come down. In fact, our own forecast is when we get to the middle of the year, we’re going to be about three per cent inflation, that’s going to feel a lot better. It’s not job done, but it’s going to feel a lot better.”
Napier: And you figure you’re going to need more hikes to get to that 3 per cent by mid year?
Macklem: “No. What we’re saying today is that if economic developments come out in line with our forecast, if that inflation forecast comes down to around three [per cent] around the middle of the year, yes we’re probably done.”
Napier: So that rate today is at 4.5. Right? And it’s going to stay that way. What do you tell Canadians out there who are struggling with this, let alone the cost of living, but these high interest rates are hurting more and more Canadians. So what are you telling them today?
Macklem: “What we’re telling them today is that inflation is coming down. We are turning the corner on inflation. And, what that means for Canadians is the big rises in the cost of living that they’ve been struggling with, the cost of living is going to start coming up at a slower rate. That is going to feel better to Canadians. And look, we’re not talking about cutting interest rates yet. That is something really to be thinking about, you know, well into the future.
“What we’re talking about today is whether we’ve done enough. But at some point when inflation has come down, when the economy is rebalanced, yes it will be time to start thinking about lowering interest rates a little, but we’re not there yet today.”
Napier: So what is well into the future? I know I am trying to pin you down on a date, but you say ‘look they’re going to stay at 4.5 [per cent]’ You’re keeping it at 4.5 [per cent]… You may increase that rate?
Macklem: “Yes, we may increase. If we need to increase to get inflation down, we will increase.”
Napier: How fast does it have to go down for you say ‘okay, I don’t need to move right now.’ Because it is going down, but is it too slow? Is that it?
Macklem: “I don’t have a crystal ball. We don’t have a crystal ball. We don’t know.”
Napier: Which makes your job a lot harder.
Macklem: “It does, because monetary policy works with a lag. We’ve done a lot. We’ve raised rates, as you said more than four percentage points over the course of a year. And we know that the effects of those interest rate increases, they’re still feeding through the economy.
“As you said, inflation has come down. We expect it’s going to continue to come down and if it comes down in line with our forecast, we’ve done enough. If it hasn’t, we’re prepared to do more. What we’re looking for is an accumulation of evidence. If that evidence starts to come in in-line with our forecast, we will become more confident that we’ve done enough.”
Napier: Give me an example of that evidence. You say they are many factors. Give me one example of what you want to see in order to say ‘hey, I can start bringing those rates down.’
Macklem: “Well let me bring it down to the prices of goods and services people buy, what are we expecting to see? So, we’ve already seen gas prices, gasoline prices have come down…We’re seeing the prices of goods like appliances, furniture, we’re seeing the rates of inflation in those goods are coming down… It’s in those goods where you’re going to see inflation come down first.
“Food we do think it’s going to come down. It’ll probably take a little bit longer, global agricultural prices are high. Housing, we are seeing house prices come down. They’ve been very elevated, they are coming down. That will feed through as well.
“Service prices will probably take a little bit longer because the economy is overheated. It’s slowing but it’s still running hot, and that’s still putting upward pressure on domestic prices. But as those higher interest rates work through, those prices will come down. And as I said, by the middle of the year, the middle of this year, we think inflation will be around 3 per cent.”
Napier: You’ve talked about the housing market, how concerned are you about that market? And you know, many Canadians are going to start renewing their mortgages at higher rates. Are you concerned about defaults, about Canadians going underwater? You know that what you do has a direct effect on people’s lives. Are you concerned about that?
Macklem: “You’re right, particularly for Canadians who bought houses at the peak they took out a variable rate mortgage, they are being really squeezed by the higher interest rates. The higher interest rates have fed through to higher interest payments very quickly.
“Most Canadians have five year mortgages and as they renew those mortgages, yes, they will be renewing at higher rates. And what that means to be frank is that they’re going to have less money leftover to buy other things. And unfortunately, that’s how monetary policy works. That’s part of the process that will slow spending in the economy, and that’ll give supply the opportunity to catch up.
“And that will relieve the price pressures. Once we get inflation down, we can resume sustainable growth and things can get back to normal, but inflation is not going to fade away by itself.”
Napier: You’ve probably heard about the ‘r’ word going around, you know, Canadians are concerned about possible layoffs now, and about a recession, which many economists are predicting. So how should they prepare themselves for what’s coming? Because that’s what they’re being told, the cabinet yesterday was briefed by actually a former deputy of the Bank, saying look, you know, brace yourself. So how should Canadians behave? How should they prepare?
Macklem: “Well, our own forecast has growth slowing. It is going to feel painful. We’re not predicting a recession, we’re predicting roughly zero growth for the next two or three quarters. But, look with roughly zero growth, we could get two or three quarters of slightly negative growth. So we can’t rule out a mild recession… So that is not going to feel great. But, we’re not predicting a major contraction. We’re not predicting a serious recession with large increases in unemployment.”
“So look, how should Canadians prepare? I think try to accumulate their buffers, make sure that they can absorb tougher times.”
Napier: So I want to get to the credibility factor because the Bank of Canada has been talked about even in Parliament a lot. So you miscalculated earlier this year saying inflation was, you know, transitory and doesn’t seem to be very transitory right now. Critics are saying that you waited too long to start raising those interest rates and had to cram eight increases in 10 months… So, what would that do to the bank’s credibility if now, we did get into a recession?
Macklem: “You know, as I’ve said in the past, when circumstances changed, as soon as we saw the momentum and inflation, we did move forcefully. We raised rates rapidly, and it’s working.
“We are trying to balance the risks of over tightening and under tightening. But the reason that we raised rates so rapidly, so forcefully last year, was really to try to avoid the need for even higher rates in the future. And it was by raising rates rapidly that we’re starting to the cool the economy, we’re starting to get inflation to come down. Had we moved more slowly, we would we wouldn’t be on pause. We would still be rising, and there’d be there’d be more pain to come.”
Napier: You said something really interesting today about transparency, which is something that was—if you’ll allow me—lacking in the Bank of Canada. Unlike you know, your American counterparts, you never published minutes of your deliberations. They’re very secretive. It’s like you’re in a bunker somewhere and you make decisions that affect people’s lives. But today, you said that on Feb. 8, you will give a more detailed summary of your deliberations with the governing council. Why did you decide now many, many years after the Americans to become more transparent? Is it because you have been quite criticized and even attacked by politicians, but also by economists? Why the need for transparency now?
Macklem: “Well look, the first thing I want to stress Joyce, is I don’t really buy your premise. We are a very transparent central bank. We publish our forecasts. We put our forecast out today.”
Napier: Yes but… Why are the Americans able to do that three [weeks] after they publish their rates, they also publish the minutes of those deliberations which is something the Bank has not done. So you’re going to do that?
Macklem: “We are a very transparent central bank. We explain our decisions and yes, we announced you know, the IMF came in and they assessed our transparency. They actually gave us very high marks but they did recommend that we publish a summary of the deliberations. It’s something actually we were considering, and with the IMF’s advice, we are taking that step.
“And what is that going to do? Yes, it will give some additional insight into our decision-making process. What were the key factors at play? What were the options on the table? And really, how did we drive to a consensus decision?”
Napier: But is that important, that people should know those things?
Macklem: “I think what it will do is that the more people, the more markets understand our decision-making process, I think the more predictable, the more understood the Bank will be. And one thing we know from our own public surveys is the more people understand about us, the more they tend to trust us, the more they tend to have confidence in the Bank of Canada, and fundamentally, we’re in the business of confidence.”
Napier: I want to get to quantitative easing or as a former head of the [U.S. Federal Reserve] called it ‘printing money’ which is what central banks have been doing in the last years. And recently, you have as well, trillions of dollars. So has that contributed to inflation? And are you know, citizens paying for that today?
Macklem: “So, first of all, quantitative easing, it is an exceptional thing. We had never done it before, but in this pandemic, with the economy collapsing, with GDP minus 15 per cent, more than three million Canadians unemployed, and our interest rates already at zero, we did take the extraordinary step of quantitative easing, which basically means buying large quantities of Government of Canada bonds.
“And the way to think about that is what does that do? It’s another way to lower interest rates. It lowers peoples’ mortgages, and that helped stimulate the economy… And it worked. You know, the recession was terrible, but we had the fastest recovery ever. And we’ve ended quantitative easing more than a year ago now. We’ve been we’ve been raising rates forcefully to bring inflation back down.
“Look, I’m not saying we got everything exactly right. This has been an unprecedented pandemic. And with the benefit of hindsight, we could have done some things better. But I think when you step back, it’s actually worked out reasonably well. It could have been a lot worse.”
Napier: The Canadian dollars is weakened against the U.S. dollar…. It may hit below the 70 cent mark. Are you concerned about that?
Macklem: “Actually, the Canadian dollar in recent months has been pretty stable around 74 cents U.S.”
Napier: What if it goes under?
Macklem: “Well, if it goes down, you know, that is something we have to factor in. If it goes down, one of the things that will happen is that the goods that Canadians buy from the U.S. will become more expensive and we’ll get a bit more inflationary pressure. So that is something that would be of concern. But I would stress that look, the exchange rate, it fluctuates in markets, it’s determined in markets. It’s something we take into account. We don’t have an exchange rate target. We have an inflation target, and our goal is to get inflation back to two per cent.”
Napier: Governor Tiff Macklem, thank you so much for taking the time.
Macklem: “It’s a real pleasure Joyce, thanks for having me.”
With files from CTV National News Producer Jordan Gowling
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