Bank governor cites progress in inflation, emphasizes need to restore price stability
Bank of Canada governor Tiff Macklem emphasized the central bank’s focus on core inflation indicators in a statement before the House of Commons Standing Committee on Finance yesterday – and reiterated its willingness to further hike interest rates if required to return the inflation rate to 2%.
Macklem highlighted that inflation is coming down quickly, with data showing it fell to 4.3% in March, and is forecast to be around 3% this summer. However, several things still have to happen to get inflation all the way back to the 2% target, including inflation expectations coming down further, services price inflation and wage growth moderating, and corporate pricing behaviour normalizing.
He also gave some economic and financial context for the decision to maintain the policy rate at 4.5%. The Canadian economy remains in excess demand, and GDP growth in the first quarter of the year appears stronger than projected in January, while the labour market remains tight. The unemployment rate, at 5%, remains near its record low, and wages continue to grow in the 4% to 5% range. However, past policy rate increases are working their way through the economy and restraining demand.
"We are focused on these indicators, and the evolution of core inflation, to ensure that consumer price index (CPI) inflation continues to progress toward the target. If monetary policy is not restrictive enough to get us all the way back to the 2% target, we are prepared to raise the policy rate further to get there," he said.
Macklem underlined that the Bank of Canada's job is to get inflation all the way back to the 2% target and said that while they are encouraged by the progress so far, their job is not done until price stability is restored. Price stability is crucial to restoring competitive forces in the economy and allows Canadians to plan and invest with confidence.
"Governing Council also discussed the risks around our projection. The biggest upside risk is… that services price inflation could be stickier than projected,” he said. “The key downside risk is a global recession. If global banking stress re-emerges, we could be facing a more severe global slowdown and much lower commodity prices," he said.
Macklem’s financial promise
"Our job at the Bank of Canada is to get inflation all the way back to the 2% target. We are encouraged with the progress so far. And seeing inflation get down to 3% this summer will be welcome relief for Canadians,” he said.
“But let me assure Canadians that we know our job is not done until we restore price stability. Price stability is important because it restores the competitive forces in the economy and allows Canadians to plan and invest with the confidence that their money will hold its value. That’s the destination—we are on our way and we will stay the course.”
