This is not the right time to start considering cutting interest rates, Macklem says

The alternative would have been worse.

That was the message from Bank of Canada governor Tiff Macklem Wednesday as he gave an impassioned defence of the Bank’s interest rate-raising battle against inflation — and said there’s still a chance of more rate hikes.

“We know that the higher interest rates that are working to bring inflation down are making things difficult for many Canadians. And slow growth doesn’t feel great. But the alternative — years and years of high inflation and then a deep recession — is much worse,” said Macklem in a speech to the Saint John Region Chamber of Commerce in Saint John, N.B.

Macklem said the threat of entrenched higher inflation is a much greater threat to Canadian households and the broader economy than the pain caused by higher interest rates.

“Nothing concerns me more than the pain that high and volatile inflation is causing so many Canadians and the broader costs it’s imposing on our economy,” said Macklem.

In March 2022, the Bank of Canada began an aggressive rate-hike campaign in a bid to drive inflation down to its target of two per cent. Before the campaign, the bank’s key overnight lending rate sat at 0.25 per cent. Now, it’s at five per cent, the highest in 22 years.

 

 

The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving prices down and slowing the economy.

In October, Canada’s annual rate of inflation dropped to 3.1 per cent, down from 3.8 per cent in September, Statistics Canada revealed Tuesday.

While that’s well below the 8.1 per cent inflation peaked at in June 2022, it’s still above the Bank’s two per cent target.

“This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability. But if high inflation persists, we are prepared to raise our policy rate further,” Macklem said.

In a question-and-answer session following his speech, Macklem said, however, that the Bank could begin lowering interest rates even before inflation falls to two per cent, as long as it looks as though it’s clearly on the way there. This week’s wasn’t enough on its own, Macklem said.

 

 

“We need to see a number of months where there’s clear evidence,” said Macklem. “Right now it’s not time to start thinking about cutting interest rates.”

 

But acting quickly and decisively was necessary to avoid the entrenched high inflation seen in the 1970s, said Macklem.

“The lesson from the 1970s is that fighting inflation half-heartedly and living with the stress, labour strife and uncertainty inflation can cause would be a huge mistake,” said Macklem.

Inflation affects lower-income Canadians more harshly than others, Macklem said.

“The rising cost of living is making life harder for everyone, especially Canadians who have less to start with,” Macklem said. “People are working hard, but their salaries don’t buy what they used to. They can’t afford the things they need to live. It feels unfair. That feeling of unfairness eats away at the fabric of society.”

 

 

This article was reported by The Star