Bank of Canada Governor Tiff Macklem insists that interest rates must continue to rise to tame inflation, despite growing risks of a recession next year, a- he pleaded Friday, following the annual meeting organized by the International Monetary Fund (IMF).
“There was an atmosphere of concern but there was also an atmosphere of determination around the table,” Macklem said, referring to conversations he had with industry colleagues in Washington during the meeting with members of the press.
The volatility of energy prices, uncertainties on the geopolitical scene or even the “unintended consequences of a necessary tightening of financial conditions” are among the main subjects of concern, listed Mr. Macklem.
The risk that high inflation takes root
“There is the fear that the longer high inflation remains, the greater the risk of high inflation taking root. There is a broad consensus to say that the most immediate threat to our current and future prosperity remains this high inflation,” declared the Governor of the Bank of Canada, determined to continue his policy of raising the key rate, despite the outlook. declining growth and the growing risk of a recession early next year.
In August, the consumer price index rose 7% on an annual basis in Canada – down from the peak in June (8.1%), but still well above the target for the Central Bank to keep inflation around 2%. Core inflation, which excludes volatile priced items like food and fuel, shows no signs of dissipating, Macklem said.
In addition to lower inflation, the Bank of Canada also hopes to see “a cooling in the job market,” Mr. Macklem said, as the economy continues to overheat.
According to Statistics Canada’s latest labor force survey, the unemployment rate fell to 5.2% in September as fewer Canadians looked for work, from 5.4% in August. In September, the Canadian economy posted a gain of 21,000 jobs, after three months of net losses.
Restrictive rate policy
With the Bank of Canada due to make the next key rate announcement on October 26, at the same time as it files its report on economic forecasts, another hike seems inevitable.
After raising the policy rate by one percentage point in July and three-quarters of a percentage point in September to 3.25%, Canada’s rate policy is now restrictive, or above the neutral rate while it is between 2% and 3% according to the Bank of Canada.
“We have been clear that interest rates must continue to rise. To what extent and for how long will they have to be to restore price stability? We will assess that based on how the economy develops,” Macklem said.
In a recent report, the Organization for Economic Co-operation and Development (OECD) estimated that Canada’s policy rate could rise to 4.5% in 2023.