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Bank of Canada governor Tiff Macklem speaks at a press conference in Ottawa on June 9, 2022.PATRICK DOYLE/The Canadian Press

Bank of Canada Governor Tiff Macklem says more interest rate increases are necessary to tame inflation, maintaining a hawkish outlook for monetary policy even as the economy slows and inflation begins to recede.

In a speech to the Halifax Chamber of Commerce on Thursday, Mr. Macklem said the Canadian economy is still overheating, and domestic inflationary pressures have yet to ease.

“Simply put, there is more to be done,” Mr. Macklem said in his first speech since the bank’s July rate decision. “We will need additional information before we consider moving to a more finely balanced decision-by-decision approach.”

The Bank of Canada has raised interest rates five times since March, moving the benchmark policy rate to 3.25 per cent from 0.25 per cent in one of the fastest rate hike cycles on record. The key question for investors and borrowers is how much further the central bank intends to go.

Most private-sector forecasters think the bank will push its policy rate to 4 per cent or slightly above before halting. Mr. Macklem, however, gave few hints that he was preparing to pivot Canada’s monetary policy.

That puts the Bank of Canada in line with the U.S. Federal Reserve and other central banks that have leaned into inflation-fighting rhetoric, even as the odds of a global recession increased markedly in recent months.

“It would be very hard to reconcile Macklem’s stridently hawkish tone with anything less than a 50 basis point move at the Oct. 26 interest rate announcement,” Andrew Kelvin, Toronto Dominion Bank’s chief Canada strategist, wrote in a note to clients.

“We are a bit reluctant to extrapolate much further than that, however, as central bank statements have very short half-lives around turning points, and by December, the bank may have enough data in hand to embrace a more finely balanced approach to rate increases,” Mr. Kelvin said.

Higher rates increase the cost of borrowing money for businesses and households, with the goal of reducing demand in the economy and slowing price increases. The Bank of Canada’s aggressive rate hikes are already weighing on economic growth, particularly in interest-rate sensitive sectors like housing.

Mr. Macklem, however, focused on the fact that the economy remains in “excess demand.” That means consumers and businesses want more goods, services and labour than the economy can produce. This is showing up in low unemployment, labour shortages and rising wages.

“Competition is posing less of a restraint on price increases, and businesses are passing through higher input costs more quickly,” Mr. Macklem said. “As a result, higher energy and material costs are showing up in the prices of a growing list of goods and services. So even if there is some relief at the gas pumps, price pressures remain high and continue to broaden.”

There are positive signs on inflation. The annual rate of growth in the consumer price index fell to 7 per cent in August, down from 7.6 per cent in July and 8.1 per cent in June. Oil prices have dropped in recent months as the outlook for global economic growth has darkened. Supply chain bottlenecks are improving and shipping costs have declined.

But the bank can’t count on global developments to solve Canada’s inflation problem, Mr. Macklem said. The war in Ukraine or new COVID-19 outbreaks could further disrupt supply chains. Moreover, the depreciation of the Canadian dollar relative to the U.S. dollar in recent months is pushing up prices for U.S. imports.

“Normally when we raise interest rates, the exchange rate actually appreciates. And so that does part of the work for us. This time, that’s not happening. So other things equal, as economists like to say, that means we have more to do with interest rates,” Mr. Macklem said in a question-and-answer session after the speech.

The pace of monetary policy tightening in Canada and around the world is raising the odds of a painful economic contraction next year. A growing number of private-sector economists predict Canada will fall into recession in early 2023.

Mr. Macklem has long maintained a “soft landing” is possible, where inflation declines without a spike in unemployment or a sustained drop in economic growth. He reiterated this on Thursday, but acknowledged the path is narrow, and said Canadian households and businesses should factor the risk of a recession into their decisions.

“He was very clear that they remain resolute in bringing inflation back down to the 2 per cent target and that is the over-arching focus,” Simon Deeley, Royal Bank of Canada’s director of Canadian rates strategy, wrote in a note to clients. “This should leave no doubt that the BoC is willing to risk a recession in order to achieve 2 per cent inflation.”

Mr. Macklem did not address where he believes the end point, or terminal rate, for interest rates will be. But he pointed to several metrics the bank will watch as it plans its next moves.

It will look at “core” inflation metrics, which place less emphasis on the more volatile elements of the CPI, such as oil and food, to capture underlying trends in inflation, Mr. Macklem said. However, the bank will give less prominence to the metric known as CPI-Common, which tracks common price changes, has performed poorly over the past year and been revised multiple times.

He also highlighted the importance of inflation expectations. What Canadians believe about future inflation affects where inflation ends up. If companies and workers expect permanently higher inflation, they may set higher prices and demand higher wages in a self-reinforcing cycle. That makes the bank’s job much more difficult.

Mr. Macklem said the bank will pay close attention to the results of its consumer and business surveys, which capture inflation expectations. These will be published on Oct. 17.

“The longer high inflation persists and the more pervasive it becomes, the greater the risk that high inflation becomes entrenched,” he said.

“So far, longer-term inflation expectations remain reasonably well anchored, but we are acutely aware that Canadians will need to see inflation clearly coming down to sustain this confidence.”