Bank of Canada Governor Tiff Macklem said Monday that the risk of not raising rates enough and inflation building is greater than the risk of raising them too much and fueling a recession.
“We’re trying to balance the risks of too much and too little tightening of monetary policy,” Macklem told a business audience in Vancouver on Monday.
It’s the last time Macklem plans to speak publicly in 2022, a year in which Canada’s central bank has raised its benchmark interest rate an unprecedented seven times in an attempt to curb runaway inflation.
This aggressive campaign of rate hikes has cooled the housing market and led to fears of a recession, but in his speech Macklem said, even after the bank raised its rate to its highest level since 2008, the risk of letting inflation burn unchecked is greater. that the risk that trying to slow it down could lead to a recession.
“If we raise rates too much, we could drive the economy into an unnecessarily painful recession and overshoot the inflation target,” Macklem said. “If we don’t raise them enough, inflation will remain high and households and businesses will come to expect persistently high inflation.”
“With inflation well above target, this is the biggest risk.”
The central bank signaled last week that it may be ready to halt its aggressive rate hike cycle, but Macklem’s speech on Monday was a reminder that the bank’s policy will depend on economic data and whether the economy shows signs of returning to normal. inflation rate
After peaking at 8.1 per cent in July, Canada’s annual inflation rate slowed to 6.9 per cent in October, still well above the 2 per cent target from the Bank of Canada.
In his speech, Macklem made it clear that the bank’s rate hikes will achieve the goal of reducing inflation at some point.
“Higher interest rates are working to rebalance the economy,” he said. “Inflation will come down … the adjustment will not be easy, but restoring price stability is the most important thing we can do to improve the economic and financial well-being of Canadians.”