The fight against inflation could be more difficult than expected and require more interest rate hikes, Bank of Canada Governor Tiff Macklem told the Senate Banking and Commerce Committee on Wednesday.
Posted at 5:00 p.m.
Updated at 6:14 p.m.
The governor was answering questions from senators, some of whom questioned the central bank’s ability to bring the inflation rate back to the 2% target.
“You were talking about something transitional,” said Elizabeth Marshall, senator from Newfoundland and Labrador. You missed the mark with this transient inflation. How will you restore your credibility? she asked.
“The best way is to bring inflation down to 2%,” replied Tiff Macklem. Other questions focused on the central bank’s inability to forecast inflation as high as the current rate. “It gives the impression that the bank is not in control,” said Senator Paul Massicotte.
The governor explained to the committee of senators the new roadmap of the central bank. “Emergency measures are no longer necessary and we want to make it clear that we should expect rates to go up,” he repeated.
The inflation rate will remain high, around 5%, for the first half of the year, before declining to 3% at the end of 2022 and then returning to close to the 2% target in 2023, the bank predicts. .
Economist and new Quebec senator Clément Gignac has expressed concern that restrictions on the supply of many products may last longer and keep prices high. “Could interest rates then rise more to exceed the neutral rate [estimé à entre 1,75 % et 2,75 % par la Banque du Canada] ? he asked.
“If your scenario happens, then yes, it will be more difficult,” replied the governor.
The Bank of Canada plans several key rate hikes in the coming months, but the number will depend on several variables and there is a lot of uncertainty, he explained.
Thus, households have accumulated savings during the pandemic and they will spend a good part of this money on goods and services when all health restrictions are lifted. If Canadians spend more than expected, “growth will increase more and interest rates will have to increase more,” the governor said.
Overestimated growth?
The Canadian economy is expected to grow at a rate of 4% this year and 3.5% in 2023, the central bank predicts.
“I find that you are very optimistic with this 4%,” said Pierrette Ringuette, Senator from New Brunswick. Quebec Senator Larry Smith expressed concern about the impact that interest rate hikes will have on households and businesses, and on the economy in general.
The bank’s new senior deputy governor, Carolyn Rogers, explained that the bank’s confidence in robust growth comes from the fact that the economy is doing very well right now, while there are still a lot of restrictions. “There is still a lot of growth potential,” she stressed.
The savings accumulated by households, as well as the stress tests applied by financial institutions to ensure that borrowers can withstand higher interest rates should mitigate the impact of rate hikes in the real estate sector and economy as a whole, she said.
The governor insisted that the series of rate hikes now on the central bank’s agenda will be gradual, and that the impact of each hike will be measured. “We said there would not be one increase, but several, but you can also take a break between two increases,” he said.