Bank of Canada Governor Tiff Macklem said on Monday bringing down inflation is “proving more difficult than we thought.”
He also conceded that current government spending plans are at odds with the Bank’s objective of slowing inflation. His comments were made while testifying before the House of Commons finance committee.
Macklem was grilled for a comment he made last week on the fact provincial and federal government spending is estimated to grow by roughly 2.5% next year.
“If all those spending plans are realized, government spending will be adding to demand more than supply is growing and in an environment where we’re trying to moderate spending and get inflation down, that’s not helpful,” he said in a press conference following last week’s decision to leave interest rates unchanged.
Conservative MP Jasraj Singh Hallan pressed Macklem on whether monetary policy and government fiscal policy are currently at odds.
“It would be helpful if monetary and fiscal policy was rowing in the same direction,” Macklem said in one of his responses.
Hallan then asked: “[Are they] rowing in opposite directions, yes or no?”
“Yes,” Macklem answered.
However, later in his testimony Macklem spoke to the nuances in government spending and its implications on inflation. “The amount matters, but also what the spending is matters,” he said. “So, the more that the spending is adding to supply and not demand, that will actually help moderate inflation.”
Don’t need to wait for 2% inflation before cutting rates
Responding to a question posed by Conservative MP Marty Morantz as to when Canadians can expect the Bank to begin cutting rates, Deputy BoC Governor Carolyn Rogers responded by acknowledging it’s a “question on the minds of many, in particular Canadians who are carrying mortgages.”
Since monetary policy is forward-looking, Rogers said “we don’t need to wait until inflation is all the way back to 2%.”
“If we get signs that we can be confident that inflation is coming down and will remain down, then we would start thinking about lowering interest rates, but we’re just not there yet,” she said.
The Bank of Canada’s latest forecast outlined in its October Monetary Policy Report has inflation reaching the 2% target rate by the second half of 2025.
However, Macklem also pointed to the challenges of bringing inflation back to its target due to rising global tensions, specifically the war in Israel and Gaza. This has “increased the risk that energy prices could move higher and supply chains could be disrupted again, pushing inflation up around the world,” he said.
He stressed that the situation remains dynamic, pointing to the recent change in the Bank’s forecasts released last week in which it raised its short-term inflation expectations and lowered its growth forecasts.
Macklem also commented on how the Bank underestimated just how big of an issue inflation would become—the bank repeatedly said in 2021 that inflation would be “transitory.”
“We were surprised at just how much and how fast inflation went up, and we’ve looked at those forecast years to try to understand them and avoid making those mistakes again,” he testified.
Canada has faced a housing supply issue “for a decade”
The topic of Canada’s housing supply crisis came up throughout the testimony, with Macklem saying it’s been a long-standing issue that is finally getting the attention it deserves.
“We’ve had a building supply issue in housing now for at least a decade…But we are pleased to see that governments at all levels are more focused on this issue,” he said. “I don’t think this is something that any one level of government can do this all by themselves…And ultimately the private sector is going to build most of these houses or apartment buildings, and they certainly need to be at the table as well.”
Macklem was asked about the impact higher interest rates are having on the real estate market, to which he said that elevated rates have “dampened demand.” He noted that this follows a period of low interest rates during the pandemic, which led to the market overheating and home prices rising “extremely rapidly.”
“As we’ve raised [interest rates], housing prices have actually come down,” he said. “However, higher interest rates mean the carrying cost of the mortgage is higher, so affordability has not improved.”
Political interference “not useful”
Macklem also reiterated the importance of the Bank of Canada maintaining its independence in the wake of several Canadian premiers calling on the central bank to end its rate-hike campaign.
“It is not useful when they give instructions to the Bank of Canada as to what we should do with interest rates,” he testified in French.
“And that’s because it can create an impression that monetary policy is not independent of governments,” he added. “The independence of the central bank is key to maintain price stability.”
Featured image by David Kawai/Bloomberg via Getty Images
Bank of Canada Bank of Canada Governor Tiff Macklem parliament committee tiff macklem
Last modified: November 3, 2023
Mr Macklem,
Regarding your statements “It is not useful when they give instructions to the Bank of Canada as to what we should do with interest rates,”
“And that’s because it can create an impression that monetary policy is not independent of governments,” “The independence of the central bank is key to maintain price stability.”
Correct, I appreciate the importance of maintaining the central bank’s autonomy, as it plays a critical role in ensuring stability.
However, The Bank of Canada’s decisions, while striving for that stated independence, have seemingly led to significant hardship for all Canadians. The BOC has turned a blind eye and must be made aware of the reality of policy decisions. It’s essential to gather input from diverse sources to make informed decisions. While I acknowledge the difficulty in managing economic policies, it’s evident that recent actions have not fully addressed the challenges faced by ordinary Canadians
Had the BOC worked in a proactive and timely manner, Canada would not be in as dire a situation we are now.
I do not believe that anyone was working towards the goal of a urinating for distance contest, although your defensive responses and statements would indicate that you are ready to drop your trousers to prove that the BOC will not yield its independence.
Keep in mind, that while you may operate for the most part independently, you still work at the leisure of the people of Canada.
FOR the betterment of the people of Canada.
The delayed response to inflation, followed by what seemed to be a knee jerk reaction rather than a proactive approach, has left many questioning the effectiveness and the foresight of the measures taken. There appears to be a disconnect between the traditional tools employed and the modern economic landscape, leading to unintended consequences. To put that another way, the BOC waited far to long and did not recognize the dangers ahead. The BOC reacted in panic with tools and policies used 40 years ago when those tools were effective. The BOC failed to distinguish why Canada was in such an inflationary cycle. Canada was not facing supply side inflation and did not acknowledge just how different this cycle was from times past where such blunt policies were sufficient.
The BOC then moved forward in such haste to give the illusion of timely decisive action. The BOC moved blindly and late. There was no thought of evaluating the actions implemented.
The BOC blindly sought a 2% inflation rate as if it were holy grail. That was BOC past policy. As are the tools and methods you are using to achieve this rate. No where have I seen justification for an across the board quest for a 2% inflation rate. It is artificial. It is unevaluated and obviously unproven. But I digress.
As interest rate changes, as we have all been informed relentlessly in the past, take 9 – 12 months to work through the economy, I would dare say that the BOC has far overshot the end goal they seek. This will necessitate yet another knee jerk reaction once the BOC realizes its mistakes and the damage that it is needlessly inflicting upon the economy and all Canadians.
The BOC seems to be dedicated to as self fulfilling prophecy.
Inflation is high and out of control.
Rates MUST increase to tame this high inflation.
The BOC policies themselves give greater weight to the inflationary circle.
Canadians must pay for the inflationary pressures caused by the BOC’s own policies.
The recent BOC decisions are causing the inflation Canada is experiencing.
Please, Mr. Macklem, I will happily give Mr. Westin and Mr. Sobey the extra $300.00 / month they demand so I can feed my family…if the BOC would allow me to recoup the additional hundreds or thousands I must pay for the cost of housing.
Canadians need the BOC to be a part of the solution for inflation, not to continue as part of the cause of that inflation.