Bank of Canada Governor Tiff Macklem said the Bank of Canada will only start entertaining interest rate cuts once it has “assurance” that inflation is trending back towards its 2% target.
He made the comments while testifying before the House of Commons Standing Committee on Finance today.
“We don’t want to wait until inflation’s all the way back to 2% before we start cutting interest rates,” he told committee members. “Because if we did that, we would overshoot. We’d go below 2% inflation and we’d cool the economy more than we have to.”
He said the Bank could start lowering rates before headline inflation returns to 2% given the lag effects of monetary policy, stressing that what the Bank does today can impact the economy a year and a half into the future.
As of December, Statistics Canada reported the country’s headline Consumer Price Index (CPI) rose to 3.4%, up from 3.10% in November and a 2023 low of 2.8% last June.
“So yes, you do want to start lowering interest rates before you’re all the way back, but you don’t want to lower them until you’re convinced…that you’re really on a path to get there, and that’s really where we are right now,” he said.
Deliberations have shifted from need for rate hikes to timing of cuts
Similar to comments made during a press conference following last week’s rate decision, Macklem said monetary policy deliberations have now shifted from “whether monetary policy is restrictive enough, to how long to maintain the current restrictive stance.”
However, should “new developments” continue to push inflation higher, Macklem said the Bank wouldn’t hesitate to raise rates further.
For now, he said that’s less likely given that supply and demand pressures have abated and that corporate pricing behaviour is continuing to normalize.
He said the Bank is closely monitoring underlying inflationary pressures, and still wants to see further sustained easing of core inflation, which strips out volatile basket items such as food and energy.
Can’t ignore shelter inflation
On that front, he acknowledged that shelter inflation continues to be a leading upward contributor to overall headline inflation.
However, he cautioned against calls by some who say inflation would be near its neutral target if shelter inflation wasn’t factored in. They argue shelter costs should be stripped out since they are being temporarily influenced by the central bank’s own rate hikes.
“First of all, Canadians are paying shelter costs. They’re a real cost and we can’t just ignore them,” he said.
But Macklem also argued that if you strip shelter costs, then you also have to remove some of the “unusually weak” items that are impacting inflation on the downside.
“If you use a more systematic approach to strip out the unusual ups and the unusual downs, inflation looks to be about 3.5%,” he told the committee. “What that’s telling you is the centre of the distribution is still above 3%.”
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