Bank of Canada Governor Tiff Macklem arrives for the annual meeting of federal, provincial and territorial finance ministers in Toronto on Dec. 15.Nathan Denette/The Canadian Press
Bank of Canada Governor Tiff Macklem said inflation could be “getting close to” the bank’s target by the end of next year, and that central-bank officials are becoming more confident that interest rates don’t need to move higher to get prices back under control.
Speaking in Toronto, Mr. Macklem said it’s still too early to be talking about interest-rate cuts. But he highlighted the bank’s “significant progress” in fighting inflation, and said his team could start easing monetary policy once it’s confident that inflation is “on a sustained downward track.”
“The 2-per-cent inflation target is now in sight,” he said in an end-of-year speech to the Canadian Club Toronto. “And while we’re not there yet, the conditions increasingly appear to be in place to get us there. The economy is no longer in excess demand, and underlying inflationary pressures are easing in much of the economy.”
Mr. Macklem said 2024 will be a “year of transition.” The next few quarters will be tough for many Canadians as economic growth stalls while inflation remains elevated, particularly for key goods and services such as food and shelter. But things should look up as the year progresses, he said.
“By the time I give my year-end speech next year, I expect the economy will be growing, business hiring plans will be expanding, and inflation will be getting close to the 2-per-cent target.”
The Bank of Canada has increased interest rates 10 times since March, 2022, in an effort to get inflation under control. Since July, it has held its policy rate steady at 5 per cent while warning that it could raise interest rates further if inflation proves stubborn.
Mr. Macklem softened this hawkish position on possible rate hikes on Friday. In a news conference after the speech, he said members of the bank’s governing council, which sets monetary policy, “did agree that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased.”
That’s the clearest a Bank of Canada official has been that interest rates have likely peaked.
Mr. Macklem’s speech bookended a pivotal week for central banks. On Wednesday, the U.S. Federal Reserve held interest rates steady for the third consecutive decision, but suggested that further interest-rate hikes are essentially off the table and rate cuts are coming in the new year.
This message was more dovish than expected, prompting a surge in stock and bond prices, and increased bets on rate cuts from the Fed in the first half of the year.
The European Central Bank and Bank of England followed up with holds on Thursday, although both central banks avoided the kind of tone shift seen at the Fed. Both said they needed more evidence of easing inflation before talking about rate cuts.
The crucial question for the Bank of Canada and other central banks is when rates might start coming back down. Most Bay Street analysts believe the bank could start cutting rates in the first half of next year. Interest-rate swaps markets, which capture market expectations about monetary policy, put the odds of a rate cut in March at about 50 per cent, and the odds of a quarter-point rate cut by April at 90 per cent, according to Refinitiv data.
Mr. Macklem said he didn’t want to put rate cuts on a calendar. But he did lay out a possible path forward.
“We don’t need to wait until inflation is all the way back to the 2-per-cent target to consider easing policy, but it does need to be clearly headed to 2 per cent,” he said.
Alongside a decline in core measures of inflation, he said the bank is looking to see slower wage growth, more normal price-setting behaviour from companies and falling inflation expectations.
The annual rate of Consumer Price Index inflation was 3.1 per cent in October, down from a four-decade high of 8.1 per cent in the summer of 2022. The bank’s latest forecast, from October, shows inflation staying around 3.5 per cent until the middle of 2024, then easing to around 2.5 per cent in the second half of the year. The bank will publish new forecasts in January.
“We continue to look for rate cuts in July, which fits with the Bank’s insistence that it is too early to think about rate cuts,” Andrew Kelvin, Toronto Dominion Bank’s head of Canadian and global rates strategy, wrote in a note to clients.
“But our forecast is heavily predicated on the predicted inflation path, and we’d reiterate again that central-bank messages have short shelf lives at the best of times. It may only take a month or two of soft data for the BoC to actually start considering rate cuts,” he wrote.
So far, the decline in inflation has not been accompanied by a recession in Canada or the United States that many analysts feared at the start of the year. But high interest rates, which make it more expensive for businesses and households to borrow money and service their debts, are weighing on economic activity.
Canada’s gross domestic product contracted in the third quarter, consumer spending and business investment is down, and the rate of unemployment has risen to 5.8 per cent from 5 per cent at the start of the year. Many homeowners with mortgages have been hit by big jumps in their monthly payments, and more will see sizable increases in the coming quarters when their mortgages reset.
“With the cost of living still increasing too quickly, and with growth subdued, the next two to three quarters will be difficult for many,” Mr. Macklem said, noting that the unemployment rate will likely increase further in the coming months.
When it comes to inflation, Mr. Macklem said the bank is seeing prices stabilize across a broad range of goods and services. But there are pockets where prices continue to rise quickly, including food and shelter. He said he expects food inflation to decline in the coming months, but shelter inflation to remain a more persistent problem because of a “structural undersupply of housing.”
Mr. Macklem used his speech to outline several changes to central-bank communications and forecasting. Going forward, Mr. Macklem and senior deputy governor Carolyn Rogers will speak to the media after every rate decision, doubling the number of rate announcement press conferences from four to eight a year.
And he said that the bank is also working to improve its forecasting and analysis tools, putting more emphasis on modelling the supply side of the economy and introducing additional models to help with risk management.
The bank’s next interest-rate decision is on Jan. 24.