Speaking to the Calgary Chamber of Commerce on Thursday, the Governor of the Bank of Canada Tiff Macklen defended the decisions that the central bank has made surrounding interest rates over the past year, and the decision not to raise interest rates.
The Bank of Canada had halted the fastest period of rate growth in the bank’s history at 5 per cent on Sept. 6.
Speaking to the audience of Calgary’s business leaders, he said that the bank has heard the concerns of Canadians about the pain caused by rising interest rates, but said that the outcomes from inflation would be worse.
“We’re hearing directly from Canadians, that high inflation is hurting them, and we’re hearing that the increases in our policy rates certainly are squeezing some Canadians and making life even more difficult,” said Macklen.
“Unfortunately, there is no pain-free way to restore price stability. The destination is worth it. We don’t want to make it any more difficult than it has to be, but we do require higher interest rates to lower inflation.”
Macklen defended the policy, saying that if the BOC had not raised rates then the outcomes from higher inflation rates would be a bigger problem.
As for whether Wednesday’s decision to keep rates as they are represents a shift in policy, he said that the inflation target of two per cent is in sight, but that it isn’t there yet.
“The economy has entered a period of slower growth. That is relieving price pressures, and that’s an important reason why we kept our policy rate of 5 per cent yesterday,” Macklen said.
“We know there’s lags in the effects of monetary policy. But as I underlined, inflation is still too high. The downward momentum has slowed and we are concerned that there’s a certain stubbornness in the stickiness of inflation. So maybe we don’t need to do more. But maybe we do.”
Economy being closely watched was takeaway for business community
Calgary Chamber of Commerce CEO Deborah Yedlin said that her biggest takeaway from the talk by Macklen was that Canada’s economy was being closely watched by the BOC.
“I think the business community is still struggling with issues of affordability, the higher interest costs, and wage rates, etc. So I think we’re still feeling our way through this period right now, but I do think that yesterday’s news actually was a big relief to hear,” she said.
She said that gave businesses a bit of breathing room in an economy that is affecting investment opportunities and growth.
With the Chamber’s Small Business Week coming up, Yedlin said that having a consistent rate would be essential to the many businesses that are facing issues regarding repayment of Canadian Emergency Business Account (CEBA) loans.
“When you think about the fact that people came through Covid, they have the loans that they have to pay back, rates go up, that makes it more challenging. So just having them sitting at this level helps,” Yedlin said.
“What we’d really like to see is an extension of that payback period, and we’ve reflected that to the Federal Minister, but really this is a step in the right direction for small businesses.”
Price stability core focus of the BOC monetary policy, not mortgage prices
Maklen answered questions regarding the effect that rising interest rates have had on mortgage holders and home buyers by saying that the BOC has one objective and that is price stability.
“We have to look at the whole economy. So what’s going on in the housing sector certainly factors into our decisions, but it factors in along with a lot of other things.”
He said that as the rates fell to emergency lows, in return the demand for housing soared and that led to a dramatic increase in the price of housing in Canada.
“They were up on national basis about 50 per cent over two years. With the forceful increase in our policy rate, housing prices actually came down 15–16 per cent, since bouncing back up a little bit, but have been relatively stable.”
“If that that was the only thing that happened, that would have improved housing affordability, but of course, higher mortgage costs, higher interest rates make the carrying costs of mortgages higher. So that’s, that’s hurting housing affordability.”
Macklen pushed off the solution to affordability for housing to political decision-makers, saying that the issue wouldn’t be solved through interest rate changes.
“Housing policy is the policy of elected governments, not the Bank of Canada. But I am we are pleased to see that governments at all levels are really starting to get together to put their heads together and figure out how are we going to cut through some of the barriers to growing supply.”
He said that overall, housing markets tend to be local and that the Calgary market did not see the kind of rate increases in purchasing prices that were seen elsewhere in the nation like in Montreal, Vancouver, or Toronto.
Maklen did acknowledge that the increase in mortgage costs was having a large effect on inflation, saying that the rise in the consumer price index for mortgages was up approximately 30 per cent from 2022.
“When you exclude mortgage interest costs from the CPI, what’s left is increasing at around two and a half percent. And that has led some to argue that inflation is effectively back at target,” he said.
“It’s true that if we hadn’t raised interest rates, mortgage costs would likely be lower today. But inflation throughout the economy would be higher inflation and would be a much bigger problem than it is today.”
Macklen addresses some misinformation regarding drivers of inflation
Among the other issues addressed by Macklen during his talk, were some of the governmental policies that have been blamed for high inflation across the country.
Chief among those were government spending and the federal government’s carbon tax.
Macklen addressed the latter by stating that Canada’s carbon pricing program increases inflation in Canada by 0.15 per cent.
“Inflation is measured over 12 months, so each year it’s 0.15 , but that’s a relatively small effect on your plate,” he said.
“As you’re well aware, the carbon tax goes up periodically. So when we forecast inflation, we know what the carbon tax is going to do. We build that into our forecast, just the way we build in other elements, other fiscal decisions.”
The effect of a wider range of government spending, he said, was harder to calculate because individual programs have had individual effects on the economy.
“Some parts of government spending largely affect demand, and obviously, everything else equal that contributes to inflationary pressures. Other parts of government spending effect have important effects on supply,” Macklen said.
“For example, subsidized daycare increases labor market participation, particularly for women with young children and that adds to supply in the labour force. On the other hand, other policies add to demand. I can’t give you a nice number, because government spending is not one policy. It’s many, many policies.”
He said that BOC takes into effect the plans of the government, and builds those into the forecasts that the BOC produces.
“If you look at overall government spending in the economy over the last number of quarters, it’s been averaging around 2 per cent—and that’s all levels of government, federal and provincial. What that means is that government spending is contributing to growth. It is adding to demand in the economy,” he said.
“We have inflation coming gradually back to our 2 per cent target by 2025. Now, if governments were to increase the rate of growth of spending, that would make it more difficult to get inflation back to target.”
