Bank of Canada Governor Tiff Macklem said the central bank could begin cutting interest rates before inflation is all the way back to target, although he said that discussion about loosening monetary policy is still a ways off.
“We don’t need to wait until it’s back to 2 per cent,” Mr. Macklem told the parliamentary finance committee on Monday, speaking about the rate of inflation. “But we need to wait until we’re clearly on a path to 2 per cent.”
Last week, the Bank of Canada held its policy interest rate steady at 5 per cent for the second rate decision in a row.
The bank has not ruled out further interest-rate hikes if inflation proves stubborn. However, markets and Bay Street forecasters widely believe the historic monetary policy tightening campaign is at an end. That’s led to speculation about when the bank might begin to cut interest rates, with many analysts betting on rate cuts beginning sometime in the middle of next year.
Last week, the bank released a new forecast projecting that inflation would remain around 3.5 per cent for the next year before falling to 2 per cent by the middle of 2025.
Senior deputy governor Carolyn Rogers told the committee that the bank didn’t want to give “false precision” about when it would begin cutting rates. But she noted that monetary policy is forward-looking. That means the bank needs to set interest rates today based on where it thinks inflation will be many quarters in the future.
“We would love to be surprised and find out that we were too pessimistic and we’re able to bring rates down sooner. … We will look forward as much as Canadians to getting interest rates back to a neutral level. But right now our priority is to get inflation down,” she said.
The near-term inflation outlook is mixed. Higher interest rates are slowing the economy and dragging down inflation across a range of goods and services. However, oil prices are rising amid geopolitical turmoil and shelter costs keep going up, leading the bank to warn last week that inflation risks are increasing.
The committee meeting focused heavily on housing affordability, and the role of government spending in fuelling inflation. Mr. Macklem argued that housing affordability would remain a problem until Canada can deal with a structural shortage of homes.
“We had a supply problem at low interest rates, we have a supply problem at high interest rates. Obviously, interest rates have a big impact on the housing sector, which is very interest sensitive, but we’re not going to solve the housing shortage with interest rates,” he said.
Mr. Macklem was asked repeatedly by Conservative members of the committee whether government spending was fuelling inflation. He said that spending by federal and provincial governments had not been a driver of inflation over the past year. However, based on current budget plans, he said that fiscal policy may be working at cross purposes to monetary policy next year.
“Over the past year, government spending at all levels, federal and provincial, by our estimates has grown less than 2 per cent, so it has not been getting in the way of getting inflation down. Looking forward our estimate is that it will grow slightly faster than supply and against that background, yes it could begin to make it harder to get inflation down,” he said.