What will the Bank of Canada’s next steps be?

Bank of Canada governor Tiff Macklem has reiterated that the central bank will remain committed to its goal of pulling inflation back to 2% or lower, but he also warned that it will take a lot to get there.

“The world looks a lot different now than it did during the past 30 years,” Macklem said in a speech earlier this month. “Greater geopolitical tensions and a backlash in some areas against globalization will make it harder to bring inflation down and keep it there.”

Macklem offered assurances that the BoC has the necessary tools that will allow it to address uncertainty and respond to unpleasant surprises. Still, he said that what is ultimately needed is to provide the environment that will help reduce demand so that supply will have a chance to catch up.

“It will take time for higher interest rates to bring inflation back to target, but the good news is that they are starting to work,” Macklem said. “We know the adjustment is difficult. But it will be worth it.”

What is the likely inflation rate moving forward?

However, despite these measures, the central bank is anticipating headline inflation to be at 2.8% by the end of 2023, and will only stabilize to the target of 2% by Q4 2024.

“We are trying to balance the risks of over- and under-tightening monetary policy,” Macklem said. “If we raise rates too much, we could drive the economy into an unnecessarily painful recession and undershoot the inflation target. If we don’t raise them enough, inflation will remain elevated, and households and business will come to expect persistently high inflation.”