Bank of Canada Governor Tiff Macklem indicated on Wednesday that interest rates might have reached their peak, emphasizing that excess demand has dissipated, and a prolonged period of weak economic growth is anticipated. The Bank of Canada, in its effort to curb soaring inflation, had raised rates 10 times between March of the previous year and July 2023, reaching a 22-year high of 5.00%. While inflation, which surged to over 8% last year, eased to 3.1% in October, it still exceeds the bank’s 2% target.
Macklem, addressing the Saint John Region Chamber of Commerce in New Brunswick, noted that the tightening of monetary policy has been effective, suggesting that interest rates may now be restrictive enough to guide the economy back to price stability. He acknowledged the expectation of continued economic weakness in the coming quarters, emphasizing the absence of excess demand that previously fueled inflationary pressures.
The Bank of Canada Governor reiterated the institution’s readiness to raise rates further if deemed necessary. While Macklem had hinted last month in an interview with CBC that rates might have peaked, this statement marked the first formal acknowledgment that borrowing costs could be at sufficiently high levels.
Macklem’s comments align with predictions from analysts and money markets, anticipating a potential rate cut by the middle of the next year. However, it’s worth noting that during the BoC’s policy meeting on Oct. 25, some members believed that additional rate hikes might be necessary, as outlined in the summary of their discussions.
The Governor’s remarks came a day after the release of the government’s Fall Economic Statement, which included new spending measures aimed at addressing affordable housing. Despite the increased deficit spending and slower debt reduction outlined in the statement, Macklem has consistently emphasized the importance of aligning monetary and fiscal policies to combat inflation effectively.
Acknowledging the impact of restrictive monetary policy, Macklem noted that higher interest rates are placing financial strain on many Canadians but are essential for relieving price pressures. He emphasized the necessity of these higher interest rates and short-term slow growth to achieve low inflation and stable growth in the years ahead.
On November 9, the Bank of Canada signaled that the era of super-low interest rates was likely ending, cautioning businesses and households to anticipate higher borrowing costs. The bank highlighted that about 60% of mortgage holders are yet to renew their home loans at elevated rates, indicating a significant portion of the population adapting to the changing interest rate environment.
Featured Image: Freepik