BoC’s Macklem: Rate hikes will end soon, but “we are not there yet”

Steve Huebl

Bank of Canada

November 2, 2022

The Bank of Canada is nearing the end of its rate-hike cycle, but it’s not quite there yet.

That was the message from the central bank’s Governor, Tiff Macklem, in his opening remarks to the Senate committee on banking, commerce and the economy this week.


“This tightening phase will draw to a close,” he said. “We are getting closer, but we are not there yet.”


The Bank of Canada has now hiked its overnight target rate by 350 basis points since March, with its most recent rate hike of 50 bps announced last week.


Macklem noted that there is still work left to do to bring inflation back to its target of 2%. “The Bank of Canada’s job is to ensure inflation is low, stable and predictable,” he told the committee. “We are still far from that goal. We view the risks around our forecast for inflation to be reasonably balanced. But with inflation so far above our target, we are particularly concerned about the upside risks.”


According to the Bank’s latest forecasts unveiled in its October Monetary Policy Report, the Bank expects headline inflation to average 6.9% in 2022 before falling to 4.1% in 2023 and 2.2% in 2024.


Current rate hikes are showing signs of working

While the economy is still “overheated,” as Macklem described, he added that interest rate hikes to date are starting to have a moderating impact on growth.


That’s most evident in the sectors of the economy that are most sensitive to interest rates, including housing and spending on “big-ticket” items.


“But, the effects of higher rates will take time to spread through the economy,” Macklem added. “There are no easy outs to restoring price stability. We need the economy to slow down to re-balance demand and supply and relieve price pressures.”


The Bank expects a slowdown in economic growth in the coming quarters, with GDP averaging 3.3% for all of 2022, just 0.9% in 2023, and picking up to 2% by 2024.


“We expect growth will stall in the next few quarters—in other words, growth will be close to zero,” Macklem said.


The Bank is walking a fine line

The BoC Governor also touched to the difficult situation the Bank finds itself in trying to balance the risks of both under- and over-tightening.


“If we don’t do enough, Canadians will continue to endure the hardship of high inflation. And they will come to expect persistently high inflation, which will require much higher interest rates and, potentially, a severe recession to control inflation. Nobody wants that,” he said.


“If we do too much, we could slow the economy more than needed. And we know that has harmful consequences for people’s ability to service their debts, for their jobs and for their businesses.”


He acknowledged the current “burden” facing Canadian households, particularly those with significant debt loads. But he reiterated that higher interest rates are necessary in the short term to return to price stability and sustained economic growth.


“We don’t want this transition to be more difficult than it has to be,” he said.

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