Interest rates need to keep rising to fight inflation, Tiff Macklem tells MPs

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Parliamentarians questioned Bank of Canada Governor Tiff Macklem about inflation and historic financial losses at the central bank on Wednesday, with top opposition politicians looking to frame the bank’s continuing dilemmas to their political advantage.

Mr. Macklem used his appearance before the finance committee in Ottawa to reiterate the central bank’s core message: Inflation remains too high and interest rates need to keep rising.

The Bank of Canada has raised interest rates six times this year, and is widely expected to announce another interest rate hike on Dec. 7.

The most pointed questions for Mr. Macklem came from New Democrat Leader Jagmeet Singh and former Conservative Party leader Andrew Scheer. Neither politician is a regular member of the finance committee, and their presence highlights how central monetary policy has become to political debate.

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Mr. Singh pressed Mr. Macklem on the impact of corporate profits on inflation. Unions and left-leaning politicians have argued in recent months that the central bank is putting too much emphasis on wages pushing up inflation, and not enough on corporate greed.

Mr. Macklem acknowledged that companies have been passing rising costs along to customers with relative ease, which has allowed them to protect their profit margins. But he said he expects businesses to pass along savings to customers as input costs decline.

“Overall, if you look at profits as a share of GDP, they are up,” Mr. Macklem said. “A big part of that is that oil prices, energy prices have gone up a lot. The input prices in the energy field have not gone up as much as the selling price, and so their profits are up.”

The Conservatives, led by Mr. Scheer, dialled in on the Bank of Canada losing money for the first time in its 87-year history. The central bank’s balance sheet expanded massively during the pandemic, as a result of its government bond-buying program, also known as quantitative easing, or QE. Now the rapid rise in interest rates has created a mismatch on its balance sheet.

The bank is paying a higher rate of interest on some $200-billion worth of commercial bank deposits held at the central bank than it is earning on the government bonds it bought during the pandemic, resulting in net interest losses. It estimates it will lose between $5-billion and $6-billion in the next year or two, before returning to profitability in 2024 or 2025.

Because the bank is not allowed to retain its earnings and it does not have a reserve fund, the Department of Finance needs to decide whether to cover the bank’s losses directly or come up with some other method that would allow it to make up for the losses once it returns to profitability.

The Conservatives have long criticized the bank’s QE program, and Mr. Scheer said the central bank appears to need a “bailout.” Mr. Macklem said that it was largely an “accounting issue,” and pointed to several solutions that are being developed by other central banks.

“Whatever solution is chosen, it’s not going to affect how we run monetary policy,” he said.

Mr. Macklem stayed largely on script through the appearance, arguing that more needs to be done to get inflation under control. He said the economy is overheating, with demand for goods and services outstripping supply, and with companies unable to find enough workers.

The rate of inflation has eased in recent months. Annual consumer price index inflation was 6.9 per cent in October, down from a peak of 8.1 per cent in June. But inflation is still more than three times the central bank’s 2-per-cent inflation target.

After six interest rate hikes this year, the key question is how much further the bank intends to go. Financial markets are betting on another quarter-point move at the December meeting, followed by a further quarter-point move in January. That would bring the bank’s benchmark interest rate to 4.25 per cent early next year, at which point markets expect the central bank to pause.

“We are trying to balance the risks of under- and overtightening,” Mr. Macklem said. “This tightening phase will draw to a close. We are getting closer, but we are not there yet.”