The head of the Bank of Canada is pushing back on expectations for interest rate cuts, despite calls from the market and central bank counterparts south of the border that tightening could reverse in the new year.
Governor Tiff Macklem said in a year-end speech to the Canadian Club in Toronto on Friday that “it’s still too early to consider cutting our policy rate.”
Macklem said that the Canadian economy is “no longer overheated,” which is “relieving inflationary pressures.”
However, Canada’s top monetary policymaker added that while he expects “gradual declines” in inflation amid weak economic growth in 2024, there are still risks for the Bank of Canada to consider. He cited dangers that conflicts in the Middle East and Europe could escalate as one such risk.
“When it’s clear that inflation is on a sustained downward track, we can begin discussing lowering our policy interest rate,” Macklem said. “We don’t need to wait until inflation is all the way back to the two per cent target to consider easing policy, but it does need to be clearly headed to two per cent.”
Macklem warned that interest rate hikes to date will continue to work their way through the economy in 2024, “limiting growth and employment.”
“Unfortunately, this is what’s needed to take the remaining steam out of inflation,” he said.
The national inflation rate eased to 3.1 per cent in October. The final inflation reading for the year will come Dec. 19, with some early forecasts predicting a further cooling in November.
The Bank of Canada held its benchmark interest rate at 5.0 per cent in the third consecutive decision earlier this month. Despite warnings from the central bank that rates could rise higher still, market watchers have begun pencilling in rate cuts for as early as the second quarter of 2024.
The U.S. Federal Reserve also held interest rates steady this week, signalling at the time that it expects three interest rate cuts next year.
“The Fed’s going to do what they do, we’re going to focus on what needs to be done here in Canada,” Macklem said Friday in distinguishing his approach to that of Fed Chair Jerome Powell.
– More to come.
© 2023 Global News, a division of Corus Entertainment Inc.
