Bank of Canada Governor, Tiff Macklem, told Canadian lawmakers on Monday that the country's economic growth has entered a weaker phase. The increase in interest rates has led to a decrease in consumption and is bringing demand and supply closer to equilibrium. Macklem stated, "With the economy expected to move into excess supply this year and with growth anticipated to be weak for the next few quarters, we think there's more inflation relief in the pipeline."
Macklem acknowledged that the economy has significantly cooled from its previously overheated levels. The central bank's indicators suggest that spare capacity is starting to accumulate. Although he doesn't foresee a recession, Macklem anticipates that the economy will remain weak for the next few quarters, stating, "That is necessary to reduce inflationary pressures."
The Bank of Canada recently downgraded its growth forecast, now expecting sub-1% growth in the third and fourth quarters. For 2024, the bank predicts an expansion of 0.9%.
The primary mandate of the Bank of Canada is to establish interest rates that achieve and maintain 2% inflation. Macklem expects inflation to average around 3.5% until mid-2024, followed by a further easing to reach 2% by the end of 2025. Recent data indicates that inflation rose to 3.8% in September but decelerated from the previous month.
Macklem's testimony took place during his first appearance before lawmakers this week, with another scheduled later. Days ago, the Bank of Canada maintained its benchmark rate at 5%. However, Macklem reiterated his openness to further rate increases if underlying inflation fails to decelerate as expected.
Lawmakers raised questions regarding when the Bank of Canada would begin cutting rates, stating that this was a top concern among their constituents. Carolyn Rogers, the central bank's senior deputy governor, responded that officials would need evidence of slowing inflation that remains low or close to 2%. However, she stated, "But we're just not there yet."
