One day after the Bank of Canada opted against hiking its key interest rate, bank governor Tiff Macklem sat down with Herald columnist Chris Varcoe, discussing the reasons for the decision and why he doesn’t think the country is in a recession.
He also explained why political pressure from some politicians didn’t influence the central bank’s decision, and why interest rates likely aren’t headed back to the very low levels seen before the pandemic.
The following is an edited and condensed transcript of their conversation on Thursday during his visit to Calgary.
Varcoe: You mentioned it’s too early to think about an interest-rate cut. When do you think will be the right time, because there are many Canadians who want to know when they might see some relief?
Macklem: The first point is, we understand Canadians would like to see lower inflation and lower interest rates. We’re getting there, but we’re not there yet. And we need to stay the course on interest rates to get inflation down so that Canadians don’t have to worry about big changes in their cost of living. And when we do that, then interest rates can come down.
So, yes, I said we’re not there yet. It’s too early to be thinking about interest rate cuts because we’re still seeing persistent inflationary pressures. Inflation has come down, but that progress has slowed and inflation is proving stubbornly persistent.
You asked me when Canadians expect interest rates to come down. I’ll start with inflation. Inflation is running a little over three per cent.
In the near term, unfortunately, it’s probably going to go up. We know global oil prices have gone up. That will likely push gasoline prices up. So you are probably going to see inflation higher for at least a couple of months.
But we do think underlying inflationary pressures should ease. The economy is growing, it’s entered a period of slower growth, that should relieve price pressures. It’s going to take some time . . . What we decided Wednesday was to keep our policy rate at five per cent. We also agreed that we may have to raise the policy rate further if we don’t see those inflationary pressures easing.
As we get back to price stability, with demand-supply reasonably balanced in the economy, Canadians can expect that monetary policy won’t need to be as restrictive as it is today. In other words, interest rates can come down.
Progress made, but Bank of Canada governor says it’s too soon to lower interest rates
Bank of Canada’s Macklem says rates may be high enough to ease inflation
Interest rate hikes might be over but don’t expect housing market to flare up: BMO
I would say though, Canadians shouldn’t expect that they’re going to come down to pre-COVID levels. We had a decade between the global financial crisis and the pandemic with unusually low interest rates.
We’re probably not going back to those unusually low interest rates. But with inflation getting back to (the bank’s target of) two per cent, I think Canadians can expect that interest rates can be lower than they are today.
Q: How should Canadians view Wednesday’s decision?
A: The message is monetary policy is working. Inflation is coming down. The target is in sight, but we’re not there yet. We have to stay the course. The destination is worth it.
Q: Can I go back to your point about where interest rates may end up, once we get over this cycle? You said you don’t think they’re going back to where we were — the very low interest rates (pre-pandemic). Are we setting a new floor and, if so, do you have a sense of what range that new floor might be?
A: I think that is a difficult question and I’m not going to put a number on it.
When you run (and) you take our models and you try to get a sense of sort of what is the trend, the longer run trends, in interest rate . . . If you look at some of the forces that are going to be affecting us going forward: aging demographics; globalization is certainly not going to continue to extend to the degree it has in the previous two decades, and it may even recede, at least by some measures.
Climate change . . . we’re going to need a lot of investments in new technologies if we’re going to reduce emissions. And government debt levels around the world are quite a bit higher.
So, these things are all going to raise the equilibrium interest rate, or they all could raise (the) equilibrium interest rate going forward. So, it’s difficult, I don’t think we can put numbers on this.
But put it this way, I think Canadians shouldn’t count on going back to the very low interest rates that we saw before COVID . . . I think we’re going to back to something that is more historically normal.
Q: You mentioned in (Thursday’s) news conference that you don’t think we’re in a recession? How would you characterize the state of the economy right now, because for a lot of people it might feel like we’re in a recession.
A: We understand that higher inflation is hurting all Canadians and higher interest rates are really squeezing some Canadians, and that’s just adding to the difficulties they’re already facing, coping with higher inflation. So we understand that for many Canadians, it doesn’t feel good.
But a recession, what is a recession? A recession is a big increase in unemployment. It’s a contraction — it’s a big contraction — in output, output actually falling substantially. We’re not in that.
The labour market is pretty healthy. The job market is good. If anything, it’s still too tight. We’re still getting reports of labour shortages. Wage growth is higher than would be consistent with our two per cent target unless we see a big increase in productivity.
Look, we totally understand how Canadians are feeling, but when you look at where we are, we are not in the conditions of a recession.
Q: We saw letters coming from some of the premiers in the past few weeks lobbying or asking you to hold the line on rates. What impact if any, do those kinds of comments and letters have upon your decisions?
A: I have received letters. I did receive letters from some provincial premiers during our blackout period (before Wednesday’s interest rate announcement). I will be responding to those letters. But if you’re asking me if those letters influenced our decision to keep the policy rate at five per cent, the answer is no.
Our policy decisions are guided by our inflation control mandate and by our best judgments as to what is needed to deliver on that mandate. The Bank of Canada is set up to be operationally independent of governments and that independence is more important when the decisions are difficult.
The decisions are difficult right now. We can see the impact on Canadians. What I think is that those letters really reflect what the premiers are hearing from their constituents . . . We’re hearing the same thing the premiers are hearing. What we’re hearing from Canadians and what we see in the data regarding the effects of our interest rate decisions on households — those things do feed into our decisions and those things do influence our decisions.
Q: You talked about the fact progress has been made. Given those comments, but also the fact of where we are right now, what’s keeping you up at night as the governor of the Bank of Canada?
A: Really what keeps me up at night is the path back to price stability is painful. It is worth it. Canadians expect us to control inflation. But there’s no pain-free way to restore price stability . . . We don’t want to make it unnecessarily painful. And finding that balance is a delicate balance.
Postmedia is creating a new mobile app that combines all of our newsrooms across Canada into one app with tons of new exciting features. We are looking for users to be part of a testing group to provide feedback and help improve the product. Users who are selected will have full, free access to all of our app content for 1 month. Sign up here!