‘We’re getting closer’ to cutting interest rates, Bank of Canada governor tells MPs

The Bank of Canada is getting closer to cutting interest rates as inflation shows signs of falling and staying low, central bank Governor Tiff Macklem told MPs on Thursday.

“We see renewed downward momentum in core inflation. The message to Canadians is that we are getting closer. We are seeing what we need to see and we just need to be sure that it will hold,” Macklem said during an appearance before the committee. finances of the House of Commons.

Economic growth has stalled, there is an oversupply of goods, wage increases have stabilized and the labor market has cooled “from very overheated levels,” which has helped drive down prices, Macklem said.

“All of our key inflation indicators have moved in the right direction,” he said, pointing to data on “core inflation” that excludes more volatile price swings, such as food and energy prices.

“We have come a long way in fighting inflation and recent progress is encouraging.”

The next opportunity for the central bank to cut rates will come on June 5.

Macklem’s optimistic tone could be good news for homeowners and potential buyers who have been forced to buy or refinance a home with interest rates at 20-year highs.

WATCH: Bank of Canada wants to see ‘sustained’ progress against inflation, Macklem says

Bank of Canada wants to see ‘sustained’ progress in fighting inflation, says Macklem

Tiff Macklem, governor of the Bank of Canada, says she knows people want answers about when rates might change in Canada. Macklem says key inflation indicators are moving in the right direction, but added that the central bank will continue to “closely monitor developments in core inflation” in the coming months.

He said the bank’s current policy rate of five per cent has been “constraining” housing demand.

But the Bank of Canada now projects “a strong rebound in the housing sector later this year” with “some increase in housing prices,” Macklem said.

Acknowledging that higher rates have been tough on Canadians and some sectors of the economy, such as the real estate sector, the governor said the bank does not “want to keep monetary policy this tight any longer than necessary.”

But Macklem also warned that the Bank’s overnight rate will likely not return to what it was during the worst of COVID (when it was effectively zero) or even what it was before the pandemic, when it recorded 1.75 percent throughout 2019.

Macklem said he is “concerned” because borrowers expect a return to the historically low rates that were the norm for much of the period following the global recession, from 2009 to 2021.

“Interest rates are certainly not going to reach the emergency lows we had during COVID. They are unlikely to even return to pre-COVID levels,” he said.

He also warned that when the Bank begins to reduce rates, “it will probably be a fairly gradual path.”

“Canadians should not expect a rapid drop in interest rates,” he said.

Macklem’s relatively optimistic outlook on rates differs somewhat from the outlook of Jerome Powell, chairman of the U.S. Federal Reserve, the body that sets interest rates in the United States.

The Federal Reserve held interest rates steady on Wednesday.

“Inflation remains too high,” Powell said. “Further progress to reduce it is not guaranteed and the path forward is uncertain.”

Concerns about the Canadian dollar

Macklem said there’s a reason inflation has fallen more here than in the United States: Canada’s economy has been weaker than south of the border.

“We have our own currency, we can run our own monetary policy,” Macklem said, adding that a decision to cut rates while the United States holds firm could have an “impact on the Canadian dollar.”

WATCH: Canada’s inflation rate rises to 2.9% in March

Canada’s inflation rate rises to 2.9% in March

The consumer price index shows that inflation was 2.9% in March compared to a year earlier, a slight increase compared to February. Statistics Canada said gasoline prices, mortgage interest costs and rents contributed to the rising inflation rate.

“If we move below the Fed, that will tend to depreciate the Canadian dollar,” he said.

This could be problematic for vacationers and frequent cross-border travelers, but a weaker dollar could also boost the Canadian economy by making exports cheaper.

Government deficits ‘not helping’, says Macklem

Conservative MPs on the committee peppered Macklem with questions about the recent federal budget, which calls for about $50 billion in new spending over the next five years.

Macklem has said in the past that large deficit spending is “not helpful” to the Bank’s fight against inflation because it pumps more money into the economy and drives demand for products and services.

While clearly reluctant to wade into partisan politics, Macklem said Ottawa’s multibillion-dollar spending plan “won’t be that big” and isn’t expected to hurt the fight against inflation because the budget also includes tax increases that will take money away. . of the economy.

Finance Minister Chrystia Freeland’s budget projects that the federal government will raise about $19 billion in new tax revenue by raising the capital gains inclusion rate from half to two-thirds for all corporations and individuals. declare a profit of more than $250,000 in a given period. year.

That tax increase is designed to help pay for some of the government’s new health and housing measures.

“I don’t expect it to have a significant macroeconomic impact relative to our previous fiscal forecast,” Macklem said of the budget.

Conservative MP Adam Chambers challenged Macklem on that point, saying public spending growth across the country is still well above the 2 per cent target Macklem has said it should stay at to help the Bank rein in the inflation.

Macklem admitted that increased deficit spending, driven in part by growing deficits in recent provincial budgets, has challenged the Bank’s fight against inflation.

The three largest provinces — Ontario, Quebec and British Columbia — expect their deficits to total about $29 billion in 2024-25 combined, up sharply from $17 billion last fiscal year.

“The last time I was here I think I said that government spending on goods and services was forecast to grow by about two and a quarter. That’s now up to two and three quarters. That’s something over two percent, so that, yes, that does not help to try to reduce inflation,” he stated.

He said the biggest risk to the Bank’s outlook is geopolitical developments such as the ongoing wars in Ukraine and the Middle East.

Chambers also said the prospect of a capital gains tax increase could spark a rush of asset sales now, freeing up cash to spend, a development that could stimulate demand and in turn boost prices.

“We’re going to have to look at the budget a little more carefully,” Macklem said in response.