The Bank of Canada is getting closer to cutting interest rates as inflation shows signs of coming down and staying down, the central bank’s governor, Tiff Macklem, told MPs Thursday.
“We do see renewed downward momentum in underlying inflation. The message to Canadians is, we are getting closer. We are seeing what we need to see and we just need to be confident that it will be sustained,” Macklem said during an appearance before the House of Commons finance committee.
Economic growth has stalled, there’s an excess supply of goods, wage increases have stabilized and the labour market has cooled “from very overheated levels,” which has helped to bring down prices, Macklem said.
“Our key indicators of inflation have all moved in the right direction,” he said, pointing to data on “core inflation” that strips out more volatile price swings, like food and energy prices.
“We’ve come a long way in the fight against inflation, and recent progress is encouraging.”
The next opportunity for the central bank to cut rates comes on June 5.
Macklem’s upbeat tone could be good news for homeowners and would-be buyers who have been forced to buy or refinance a home with interest rates at 20-year highs.
Tiff Macklem, governor of the Bank of Canada, says he knows people want answers about when rates in Canada might change. Macklem says key inflation indicators are moving in the right direction, but added that the central bank will still be ‘closely watching the evolution of core inflation’ in the months ahead.
He said the bank’s current policy rate of five per cent has been “restraining” demand for homes.
But the Bank of Canada is now projecting “a strong pick-up in housing over the course of this year” with “some increase in housing prices,” Macklem said.
Acknowledging that higher rates have been hard on Canadians and some sectors of the economy, like real estate, the governor said the bank doesn’t “want to keep monetary policy this restrictive for longer than we have to.”
But Macklem also warned that the Bank’s overnight rate likely won’t return to what it was during the depths of COVID — when it was effectively zero — or even what it was before the pandemic, when it clocked in at 1.75 per cent throughout 2019.
Macklem said he’s “concerned” that borrowers are expecting a return to the record-low rates that were the norm for much of the post-global recession period from 2009 to 2021.
“Interest rates are certainly not going to the emergency low levels we had during COVID. They’re unlikely to even get back to the pre-COVID levels,” he said.
He also warned that, when the Bank does start reducing rates, “it’s likely to be a pretty gradual path.”
“Canadians should not be expecting a rapid decline in interest rates,” he said.
Macklem’s relatively rosy outlook on rates differs somewhat from the perspective of Jerome Powell, the chair of the U.S. Federal Reserve, the body that sets interest rates in that country.
The Fed held interest rates steady on Wednesday.
“Inflation is still too high,” Powell said. “Further progress in bringing it down is not assured and the path forward is uncertain.”
Worries about Canadian dollar
Macklem said there’s a reason inflation has come down more here than in the U.S. — Canada’s economy has been weaker than south of the border.
“We have our own currency — we can run our own monetary policy,” Macklem said, adding that a decision to cut rates while the U.S. stands pat could have an “impact on the Canadian dollar.”
The consumer price index shows inflation was at 2.9% in March compared to the year before, a slight increase compared to February. Statistics Canada said gasoline prices, mortgage interest costs and rent contributed to the increased inflation rate.
“If we move lower than the Fed, that will tend to depreciate the Canadian dollar,” he said.
That could be problematic for vacationers and frequent cross-border travellers, but a weaker loonie could also boost the Canadian economy by making exports cheaper.
Government deficits ‘not helpful,’ Macklem says
Conservative MPs on the committee peppered Macklem with questions about the recent federal budget, which calls for about $50 billion in new spending over next five years.
Macklem has said in the past that big deficit spending is “not helpful” to the Bank’s fight against inflation because it pumps more money into the economy and drives demand for products and services.
While he was clearly reluctant to wade into partisan politics, Macklem said Ottawa’s multi-billion dollar spending plan “won’t be that big” and is not expected to throw off the inflation fight because the budget also includes tax hikes that will take money out of the economy.
Finance Minister Chrystia Freeland’s budget projects the federal government will collect some $19 billion in new tax revenue by hiking the capital gains inclusion rate from one-half to two-thirds on all corporations and on individuals that declare a gain of more than $250,000 in a given year.
That tax hike is designed to help pay for some of the government’s new health and housing measures.
“I don’t expect it’s going to have a significant macro impact relative to our previous fiscal forecast,” Macklem said of the budget.
Conservative MP Adam Chambers challenged Macklem on that point, saying government spending growth nationwide is still running well above the two per cent target Macklem has said it should stay at to help the Bank tame inflation.
Macklem conceded that higher deficit spending, driven in part by rising deficits in recent provincial budgets, has challenged the Bank’s inflation fight.
The three largest provinces — Ontario, Quebec and British Columbia — expect their deficits to total about $29 billion in 2024-25 combined — up sharply from $17 billion in the last fiscal year.
“Last time I was here I think I said government spending on goods and services was forecast to grow at about two and a quarter. That has now moved up to two and three quarters. That is somewhat above two per cent so, yeah, that is not helpful in trying to get inflation down,” he said.
He said the greater risk to the Bank’s outlook is geopolitical events like the ongoing wars in Ukraine and the Middle East.
Chambers also said the prospect of a capital gains tax hike could prompt a rush of asset sales now, freeing up cash to be spent — a development that could juice demand and in turn boost prices.
“We’re going to have to go through the budget a little more carefully,” Macklem said in response.
