BoC’s Macklem: Uncertain About How Quickly Inflation Will Decline

Bank of Canada Governor Tiff Macklem on Wednesday said that there is some uncertainty about how quickly inflation will come down due to the unique nature of the COVID-19 pandemic, which has helped drive up prices. However, Macklem added that the bank is confident that inflation will eventually come down, and that the latest GDP data reinforced the view that Q4 2021 growth was strong.

With labour markets tightening and evidence of capacity pressures increasing, he added, the BoC expects higher interest rates will be needed to bring inflation back to the 2.0% target. Finally, he noted that there is some evidence that Canadians have not been dipping into excess savings as of late.

CAD has not seen any notable reaction to the latest remarks from Macklem, which were broadly in line with the tone of last week’s meeting.

Macklem, speaking to the Senate banking committee, reiterated that interest rates would have to start going up this year to tackle inflation, which is currently 4.8%, more than double the central bank’s 2% target.

“There is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before,” he said.

With labor markets tightening and evidence of capacity pressures increasing, rate rises were essential, he said. The bank said last week the economy no longer needed help to deal with the effects of the COVID-19 pandemic, but kept rates steady at a record low 0.25%.

“We are confident that inflation will come down,” said Macklem. Inflation will peak at about 5% in the first half of this year before starting to decrease, he added.