While interest rates are expected to decrease in 2024, the Bank of Canada Governor Tiff Macklem warns that the Canadian economy will still be in “transition” next year.

“We’re very focused on core inflation,” said Macklem in an interview with BNN Bloomberg. 

Macklem went on to say that the Bank of Canada will need to see “a number of months with sustained downward momentum in core inflation” before it cuts interest rates.

“(If) you look at our projection, it’s some time next year, but I’m not going to put it on a calendar,” said Macklem. 

Many economists predict a rate cut in the second or third quarter of next year. 

The central bank started increasing interest rates in March of 2022, aiming to tame inflation with a long term goal of bringing it back to 2% in 2024. 

In June, the inflation rate peaked at 8.1%, however it has steadily been decreasing since, coming in at 3.1% in October. 

The Bank of Canada benchmark rate has been 5% for the past three rate-setting announcements and Macklem said he is becoming more assured that the central bank’’s approach is effective.  

“We are certainly feeling more confident that monetary policy is working and increasingly, the conditions are in place to get us back to two-per-cent inflation, but that is not yet assured, we’re not there yet,” said Macklem.

“There are a few more things we need to see to be more confident that we’re headed back to two per cent and we’re watching those closely.”

While the Bank of Canada may be en route to hitting its long-term target, Macklem said Canadians can expect economic pain in the short-term. 

“We do expect that it’s going to be a year of transition. The first part is not going to feel good, I’m not going to sugar coat it,” he said.

“But as we get later in the year, I think we can expect growth to be picking up, inflation should be continuing to be coming down, should be getting closer to the target by the end of next year. We’re not there yet, but we’re getting there.”

In regards to the previous near-zero interest rates, Macklem said it’s unlikely that they will ever be returning to pre-pandemic levels in any case. 

“I think it is reasonable to expect that they’ll come down, but they probably won’t come down to pre-Covid-19 levels,” he said.

“We had 10 to 12 years of unusually low interest rates post-global financial crisis. I think there’s good reason to believe that we’re not going back to those very low rates. That is going to be an adjustment.”

Interest rates are increased to slow the economy down, however they also raise the risk of a recession.

Should the economy shrink in the fourth quarter, Canada will have technically entered a recession, which is marked by two consecutive quarters of negative growth. 

Macklem said he is confident that if Canada does go into a recession, that it won’t last long.

“We don’t need a deep recession, we can get inflation back to two per cent without a recession,” said Macklem.

“I’m not saying that we’re predicting virtually zero growth for the next two, three quarters. You could get some small negatives, you could get some small positives, but even if it’s small negatives, that’s not a deep recession.”