Bank of Canada Governor Tiff Macklem said that while there may still be more rate hikes ahead, there’s little chance of interest rate cuts.
That’s more bad news for those with fluctuating mortgages already at the tipping point, or with maxed-out retail credit cards, as the bank raised its key interest rate a quarter-point to 5%, the highest in 22 years.
“We’re trying to balance the risks of under- and over-tightening,” Macklem said in answer to a reporter’s question at Wednesday’s news conference in Ottawa. “If we do more than we need now, it’s going to be unnecessarily painful.”
According to the CBC, when asked repeatedly by reporters why a string of 10 interest rate hikes had not had a stronger impact on inflation, including food and house prices, Macklem and senior deputy governor Carolyn Rogers cited a number of effects, including a housing shortage, a strong labour market and the post-pandemic surge in immigration that recently sent Canada’s population to 40 million.
Macklem, in fact, addressed those food prices, telling Blacklock’s Reporter that the high interest rates will continue into 2024.
But he said he has “been surprised” by persistently high prices for groceries:
“Meat’s up 6%, bread’s up 13%, coffee’s up 8%, and baby food’s up 9%,” he noted.
This, of course, is hardly news to the hard-pressed families wrestling with the high grocery prices of today.
But not everything is a downer, says the Bank of Canada’s senior deputy director.
“There are two things that are helping buffer many households from both inflation and interest rates, and that is the savings they accumulated over the course of the pandemic,” said Rogers.
“You can see three-quarters of households have accumulated quite a bit more savings than they had prior to the pandemic,” she said, citing the Monetary Policy Report.
“The other thing we think is supporting confidence and buffering Canadians from some of the impacts is the strong labour market,” she said, adding, strangely, that people are not afraid of losing their jobs.
Over at the Financial Post, Compass Rose Group managing director Theo Argitis said the Bank of Canada “not only needs to calibrate demand in the economy, but also needs to signal that it’s tough and serious on inflation.
“This may mean having to keep rates higher than what simple models of economic slack would suggest.”
“Indebted Canadians should continue to brace themselves.”
Argitis writes that central bankers see inflation control as an exercise in “expectations management.”
“After failing to identify the inflation crisis early on, the Bank of Canada has put together a determined hiking cycle to bring those inflation expectations back down,” he says.
Significant was the Bank of Canada’s acknowledgement that inflation will take longer than expected to return to 2%.
With inflation at 3.4% today, the bank’s latest forecast is that it will not reach its goal of 2% inflation until the middle of 2025.
So the hurting will continue.
“That means almost four years of above-target inflation,” notes Argitis. “Which is a worryingly long time.”
The Canadian economy has been stronger than expected, with more momentum in demand, the BoC noted in its policy statement. “The governing council remains concerned that progress towards 2% inflation target could stall, jeopardizing return to price stability.”
According to FXSTREET, Macklem said, “with three-month rates of core inflation running around 3.5-4% since September, underlying price pressures appear to be more persistent than expected.”
“We will be evaluating whether evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving 2% inflation target, says Macklem.
BoC expects economic growth to slow, averaging around 1% through 2023 and 2024.
