Bank of Canada’s interest rate hikes are working to tame inflation: Tiff Macklem – National | Globalnews.ca

The Bank of Canada’s monetary policy is working as intended to tackle inflation, says Governor Tiff Macklem, as the central bank prepares to pause its campaign of aggressive interest rate hikes.

Economic signs are showing that the hikes are discouraging Canadians from spending, thereby lowering demand and price pressures, after a year of inflation rising to four-decade highs, says the head of Canadian monetary policy.

While global factors such as easing of supply chain disruptions have played a role in lowering prices in recent months, he also points to the central bank raising its policy rate by 4.25 percentage points in the past year and the ensuing impact on inflation.

Headline inflation peaked at 8.1 per cent in June of 2022, with the most recent figure for December showing annual price hikes have cooled to 6.3 per cent.

“With inflation above six per cent, we are still a long way from the two per cent target,” Macklem said Tuesday. “But inflation is turning the corner. Monetary policy is working.”

Macklem made his comments, largely in French, during a speech to a business audience in Quebec City. An English transcript of his prepared remarks was posted online.

He reiterated the central bank’s forecast that economic growth will be essentially zero over the next three quarters — risking a possible recession in Canada, but effectively relieving “inflationary pressures.”

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Higher interest rates have “moderated” household spending, he said, particularly in sectors such as housing that are sensitive to rate changes.

The Bank’s preferred measures of core inflation remain stuck around the five-percent mark annually, he said, but shorter-term three-month gauges suggest these figures will drop below that bar in the months ahead.

Macklem added there are also signs Canada’s tight labour market is starting to ease and expectations from Canadian businesses show they’re not baking high inflation into their long-term pricing plans.

But while the prices of goods have dropped from earlier highs, a possible stickiness in services inflation is among the biggest risks to the Bank of Canada’s inflation outlook, which sees inflation dropping down to three per cent by mid-year.

Possible volatility in global energy prices — a significant factor fueling inflation in 2022 — is also a risk the Bank of Canada is watching closely, Macklem said.

Accordingly, while the central bank announced plans to pause its rate increases last month to let its hikes to-date work their way through the economy, Macklem reiterated Tuesday that the Bank is prepared to “act forcefully” and continue to raise rates if data shows inflation is not declining in line with its forecast.

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