Statistics Canada reported the annual pace of inflation slowed sharply to 3.1 percent in October, prior to the comment made by the Central Bank Governor Tiff Macklem on Wednesday at the Saint John Region Chamber of Commerce in New Brunswick. That’s a decline from 3.8 percent the month earlier and five percentage points lower than the peaks seen in June 2022.
The apex raised its benchmark interest rate rapidly since March 2022 to cool the economy and dampen demand for spending — efforts that Macklem said are expected to continue pushing inflation down in the coming months.
“We expect the economy to remain weak for the next few quarters, which means more downward pressure on inflation is in the pipeline,” he told the crowd. “In short, the excess demand in the economy that made it too easy to raise prices is now gone.”
Statistics Canada reported that Canada’s inflation rate dropped to 3.1% in October. In his speech, Macklem acknowledged that the increased interest rates are putting financial pressure on Canadians, despite the slowdown in inflation. However, he argued that the current challenges will be outweighed by the long-term benefits of achieving price stability and bringing inflation back to the two per cent target.
Macklem said interest rates “may now be restrictive enough” to tame price pressures, but reiterated that the central bank is prepared to raise rates again if high inflation “persists.”
The apex bank has held its policy rate steady in two consecutive decisions. The Bank of Canada’s final rate decision of the year comes on Dec. 6. As for when the central bank’s policy rate could start to fall, Macklem said in a question and answer session after his speech that the Bank of Canada is watching trends of underlying inflation carefully.
Meanwhile, core inflation ticked in October after a long stretch of little movement, Macklem cautioned that “one month is not a trend.”
“We need to see several months of clear evidence that we’re on the path to two percent inflation,” he told the crowd, reiterating that it’s too soon to be considering rate cuts. The Liberal government’s fall economic statement on Tuesday predicted that Canada will avoid a recession amid slowing growth.
Heading into that fiscal update, Macklem had warned that the current pace of aggregate government spending was above levels consistent with getting inflation back down to two per cent. Ottawa’s fall update added $20.8 billion in spending over five years, but most of that funding is allocated to housing projects beginning in the 2025/26 fiscal year.
The Liberal party’s objective is to keep the deficit for the current fiscal year at or below the projected amount of $40.1 billion stated in the spring budget. Additionally, they aim to decrease the debt-to-GDP ratio in 2024-25 compared to the level mentioned in the fall economic statement.
Macklem stated on Wednesday that maintaining current spending levels over the next two years would benefit the Bank of Canada’s efforts to reduce inflation. He also mentioned that any additional spending beyond that timeframe and updates from provincial governments will be considered in the central bank’s future forecasts.
Macklem posited that there are no new ‘inflationary pressures’ in the federal fiscal outlook. The recent update introduced new fiscal guardrails to keep the federal deficit below one percent of real gross domestic product.
