The Bank of Canada had predicted a slowdown in the Canadian economy, but this slowdown is even worse than you expected. Can we still avoid recession?
Yes, the economy is weak and the next two or three quarters will be close to zero. Will it be a recession? No. It’s possible that we will have two negative quarters, so people will say that it’s a recession. We can have positive quarters too, but we anticipate around zero [pour 2024]. This is not a great recession. We don’t need a big recession to continue to bring down inflation. But unfortunately, we still need a period of weak growth to restore price stability.
So it will get worse before it gets better?
We think that next year will be a year of transition. At the beginning, the first two trimesters, it will be difficult. Inflation is still too high, the cost of living is rising too quickly and the economy is weak. But later in the year, we think we’re going to see more progress with inflation, and probably growth will improve and businesses will hire more workers.
We understand that it is difficult. We’re not going to do too much, but we should continue to let monetary policy work to ensure that inflation reaches its target.
In the discussions leading up to your latest rate decision, the bank’s board expressed concern that inflation could remain stuck above target. What could cause this?
We talked about two types of risk in our deliberations. The first is that the downward trend in inflation stops above 2%. What we see is that the economy is weak, and after two or three more quarters with very little growth, there should be more downward pressure on inflation.
There are other factors pushing inflation higher, such as the housing sector. The increase in mortgage costs is linked to our policy, we had anticipated it, but all housing costs are increasing and that creates upward pressure on inflation. Inflation will fall, but it may stop at the top of our target.
The other type of risk is that there may be new events that push inflation up. There are still possibilities for a supply shock with what is happening at the Panama Canal and the Suez Canal. If the price of oil increases and the increase affects the price of food that must be transported by truck, for example, we should respond with rate increases or by keeping our rate higher, for longer.
You have started to open the door to interest rate cuts. Could the weakness of the economy force a rate cut, even without the certainty that the drop in inflation is lasting?
Interest rate cuts may come before inflation reaches our 2% target, but right now it’s really too early to talk about cuts. We need to have declines in our measures of core inflation, we need to see that it is continuous and sustainable. Our fundamental measures are down a little in the last two months, but they are still around 3.5%. This is too much and it is certainly too early to talk about interest rate cuts.
Yes, the trends are downward, but it is very gradual. We anticipate that in the coming months, inflation will fluctuate, you have a very nice expression in French to say that, sawtooth. We think it will take a few months before we see clearer signs.
Canada is experiencing record population growth and perhaps unique in the world. How does this influence monetary policy and the fight against inflation?
The sharp increase in population has different effects on the economy depending on the market. In the labor market, new immigrants are new workers who come to reduce shortages. It helps balance the market.
We saw that the market was clearly overheated last year. There were a lot of vacancies. Vacancies are now almost at the same level as before the pandemic. We saw a small increase in the unemployment rate. This is linked to high immigration.
On the other hand, new immigrants are new consumers too. They need housing, so that creates more demand. Basically, immigration is very positive for Canada, it increases our potential growth, the growth rate that we can achieve before creating inflationary pressures. But it is clear that in the short term, there are certain adjustments. An important reason why the lack of supply in the housing sector is greater is that there are more immigrants here in Canada. We should think about all aspects of this policy.
In short, does it complicate the work of the Bank of Canada?
Yes. There is a certain adjustment when immigration increases relatively quickly.
In the long run, for inflation, it’s probably probably about neutral because it adds new workers and it also adds new demand. So supply and demand, both go up.
In the short term, there are adjustments and yes, this has effects, especially on the cost of housing. So, in the short term, it’s a little more complicated.