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Tiff Macklem holds a news conference at the Bank of Canada in Ottawa on Jan. 25.Sean Kilpatrick/The Canadian Press

Bank of Canada Governor Tiff Macklem said on Tuesday that he does not expect to continue raising interest rates, reinforcing that the central bank has entered a new phase in its campaign against inflation as sharply higher borrowing costs bring economic growth to a standstill.

The central bank raised interest rates eight consecutive times over the past year, pushing its benchmark lending rate to 4.5 per cent from 0.25 per cent. After delivering a quarter-point increase in January, the bank announced a “conditional pause” to further rate hikes.

“If new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further,” Mr. Macklem told a Quebec City audience on Tuesday. He added that the bank is still prepared to raise interest rates if inflation proves more stubborn than expected.

The annual rate of inflation stood at 6.3 per cent in December, three times the bank’s 2-per-cent target. But the bank’s latest forecast sees inflation slowing to around 3 per cent by the middle of the year, and reaching 2.5 per cent by the fourth quarter.

The Bank of Canada is the first major central bank to signal an end to monetary policy tightening. The U.S. Federal Reserve said last week that it intends to keep raising interest rates. Mr. Macklem defended his decision by pointing to the lag time it takes for rate hikes to weigh on the economy.

“Typically we don’t see the full effects of changes in our overnight rate for 18 to 24 months,” he said in the speech that focused on explaining the mechanics of monetary policy. “We shouldn’t keep raising rates until inflation is back to 2 per cent. Instead, we need to pause rate hikes before we slow the economy and inflation too much.”

The bank’s aggressive rate hikes last year – the fastest monetary policy tightening since the 1980s – have already hammered the housing market, where sales volumes and prices are far below their peaks last year. Higher borrowing costs are also weighing on consumer spending, particularly on big-ticket items such as vehicles and appliances.

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The bank expects a further slowdown in spending in the coming quarters, as more homeowners renew their mortgages at higher rates and have less money for discretionary spending. It is forecasting near-zero growth for the next three quarters, and Mr. Macklem has said that a “mild recession” could be on the cards.

This slowdown is not accidental. The bank is intentionally squeezing the economy to reduce demand for goods and services.

“With less demand, growth in our economy slows. That doesn’t sound like a good thing, but when the economy is overheated, it is,” Mr. Macklem argued. “Slowing the economy lets supply catch up with demand, and that relieves inflationary pressures.”

The annual rate of consumer price index inflation has come down since last summer, when it peaked at 8.1 per cent in June. So far, most of this deceleration has come from falling oil prices, improving supply chains and declining shipping costs, which have helped lower inflation for durable and imported goods.

But Mr. Macklem expects a broader range of goods and services prices to slow in the coming months.

“Our preferred measures of core inflation have been stuck at about 5 per cent. But timelier three-month rates have come down below 5 per cent. That suggests core inflation will start to decline in the months ahead,” Mr. Macklem said.

Despite the improving outlook for inflation, the bank remains concerned about service price inflation, which is closely tied to the tightness of the labour market. Unemployment in Canada remains near a record low. That’s adding to wage pressures, as companies compete for workers, then raise prices to cover higher labour costs.

The labour market has emerged as the key variable in central bank decision making. Mr. Macklem said in a news conference after his speech that, “if the labour market stays this tight, we’re not going to get back to 2-per-cent inflation.”

Federal Reserve Chair Jerome Powell made similar remarks on Tuesday, after blowout jobs numbers published by the U.S. Labour Department last Friday. U.S. employers added 517,000 jobs in January, and the unemployment rate fell to a five-decade low of 3.4 per cent.

“We didn’t expect it to be this strong,” Mr. Powell said at the Economic Club of Washington, adding that it “shows why we think this will be a process that takes quite a bit of time.”

While Mr. Macklem emphasized on Tuesday that the Bank of Canada is likely done with rate hikes, he said that it is “far too early” to start contemplating interest rate cuts.

Financial markets and many private-sector economists expect the bank to start cutting rates later this year. A Bank of Canada survey of Bay Street analysts, published Monday, showed that many expect the bank to cut rates by a quarter of a percentage point in October and again in December.