Bank of Canada governor Tiff Macklem says more interest rate hikes are necessary to bring inflation down, despite some early signs of a slowing economy.
Speaking to the Halifax Chamber of Commerce on Thursday, Macklem said high inflation increasingly reflects domestic pressures on prices.
The governor said while global events such as the pandemic and the Russian invasion of Ukraine have fed into higher prices, demand is outpacing supply more broadly in the Canadian economy.
Macklem said, in hindsight, the bank’s early assessment that high inflation was temporary was “overly optimistic.”
As the economy fully reopened in the spring, pent-up demand for services in sectors like travel and recreation began driving inflation even higher, he said.
“Canadians experienced these pressures first-hand when trying to book a campsite or reserve a table at their favourite restaurant,” Macklem said, according to a prepared text of his speech released in Ottawa.
After inflation reached an annual rate of 8.1 per cent in June, the pace of price increases in Canada has since slowed, largely due to lower gas prices. In August, the annual inflation rate was 7.0 per cent.
However, Macklem said the core measures of inflation “have yet to decline meaningfully” even as headline inflation has come down.
As the Bank of Canada monitors inflation and the effects of higher interest rates, the governor said it will be paying close attention to its core measures of inflation, which tend to be less volatile than the overall inflation rate.
Macklem said there are some signs that global inflationary forces are easing, and that food inflation should soon begin to come down.
Despite commodity prices falling and global supply chains easing, though, these developments are not enough to bring inflation down, he said.
With labour markets still tight, the economy still in “excess demand” and inflation still too high, Macklem said more interest rate hikes will be necessary.
The central bank has been monitoring inflation expectations among people and businesses over concern inflation could become “entrenched.” High inflation expectations can lead to businesses setting future prices even higher and workers demanding higher wages in future wage contracts.
Macklem said to keep inflation expectations in control, “Canadians will need to see inflation clearly coming down.”
“Simply put, there is more to be done,” he said.
The Bank of Canada is set to make its next interest rate announcement on Oct. 26. Since March, the central bank has raised its key interest rate from 0.25 per cent to 3.25 per cent, one of the fastest rate hike cycles in its history.
The housing market has cooled considerably in response to higher borrowing costs. Economic growth has also slowed as the economy has posted three consecutive months of job losses. However, the full effect interest rate hikes will take time to work its way through the economy.
Macklem said high inflation hurts people and business by creating “uncertainty and unfairness” and distorting decision making and undermining confidence.
The governor said the bank is “resolute” in its commitment to restore price stability in Canada.