OTTAWA—It is premature for Bank of Canada senior officials to discuss interest rate cuts, Gov. Tiff Macklem said Friday, arguing there is no clear evidence inflation is on a sustainable path toward its target of 2%.
The remarks, during a speech in Toronto, are another attempt by Canada’s central bank to push back against market expectations for rate cuts to begin in early 2024. They also emerge after Federal Reserve Chair Jerome Powell signaled the focus going forward is on when to cut rates rather than when to increase them.
Traders have bet the Bank of Canada policy rate, now at 5%, could start coming down as early as March, as the economy struggles to grow amid a weakening consumer and business profile. Rate increases totaling 4.75 percentage points, starting in March of 2020, are filtering through the broader economy. Data this week indicated the national household debt-service ratio rose to a record-high 15.2%. Furthermore, a survey of 16,000 businesses indicated managers expect to put hiring plans on hold and sales to weaken further in early 2024.
Macklem, according to prepared remarks for delivery in Toronto, said he expected inflation to gradually decelerate from its current 3.1% level, with output expected to remain weak until mid-2024 and the unemployment rate likely to rise.
“We expect growth and jobs to be picking up later next year, and inflation will be getting close to the 2% target,” Macklem said. Once senior officials are “assured that we are clearly on a path back to price stability,” they will consider whether and when the central bank can cut rates, he added.
“I know it’s tempting to rush ahead to that discussion. But it’s too early to consider cutting our policy rate,” he said. Macklem said he expects the debate among senior officials in early 2024 to focus on whether rates are restrictive enough, and “how long [monetary policy] needs to remain restrictive to restore price stability.”
His remarks come days after Federal Reserve Chair Jerome Powell said rate cuts are something that “begins to come into view” and “clearly is a topic of discussion.” Stocks rose and bonds rallied on the comments. The yield on a five-year government of Canada bond—which lenders use to price mortgage rates—is down over a percentage point after peaking earlier in the fall.
Macklem said inflation remains elevated, and growth weak. “The next two to three quarters will be difficult for many,” he said, adding consumers retrenching is a sign higher interest rates are helping bring inflation down.