Bank of Canada Governor Tiff Macklem said the inflation rate remains too high but there are clear signs that aggressive interest-rate hikes are reducing demand.
(Bloomberg) — Bank of Canada Governor Tiff Macklem said the inflation rate remains too high but there are clear signs that aggressive interest-rate hikes are reducing demand.
Policymakers remain concerned that they aren’t seeing “downward momentum” in core inflation measures, Macklem told reporters Friday, adding that his governing council is focused on analyzing how a slowing economy will influence price pressures in the future.
“It’s not so much about where inflation is now, it’s about where inflation’s going to be,” Macklem said, reiterating that policymakers are watching excess demand, inflation expectations, wages, and corporate pricing closely.
“Inflation’s still too high, it’s still too broad-based,” the governor said from Marrakech, Morocco, the site of annual meetings of the International Monetary Fund and World Bank.
The comments suggest the central bank’s decision-makers are still weighing incoming data as they assess whether they’ve hiked borrowing costs enough to bring inflation back down to the 2% target.
Macklem said markets are coming around to the idea that rates will have to stay higher for longer, and that while the recent jump in longer-term yields isn’t a substitute for tighter monetary policy, it’s something the governing council “would take into account.” Higher benchmark government yields have a knock-on effect on the cost of mortgages, consumer debt, corporate loans and other borrowing.
Canada’s economy contracted in the second quarter, and indebted households are feeling the pinch of the steep increase in borrowing costs. “We are seeing clear signs that monetary policy is working to rebalance demand and supply,” Macklem said.
Further proof of fading economic strength led Macklem and his governing council to hold the overnight rate steady at 5% when they met in September, but they left open the possibility of further tightening to tamp down any expectations for rate cuts.
The central bank’s next rate decision is Oct. 25. Traders in overnight swaps place about 33% odds of another 25 basis point hike at that meeting.
Statistics Canada will release inflation data for September on Oct. 17.
“We’re not going to be forecasting a serious recession,” Macklem said.
(Updates with additional comments from Macklem, plus other information, beginning in the fifth paragraph)
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