Bank of Canada’s Tiff Macklem not backing down from interest rate hikes, even as recession fears grow

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WASHINGTON — Bank of Canada Governor Tiff Macklem stressed Friday that he hasn’t changed his mind on interest rate hikes, even as expectations grow for a possible recession next year. .

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Now is not the time to be flexible on interest rates, Macklem told reporters from Washington, where he was attending the annual meetings of the International Monetary Fund and the World Bank, reiterating the bank’s current focus. central to restoring price stability and lowering inflation.

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Macklem said the central bank will closely monitor developments in the US economy after September inflation data released yesterday showed that core consumer price inflation, excluding food and energy, fell. hit a 40-year high, raising the odds of further big rate hikes from the hawkish US Federal Reserve.

After reaching an annual rate of 8.1% in June, the pace of price increases in Canada has slowed slightly, mainly due to lower gasoline prices.

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The annual inflation rate in August was 7%, but Canadians were still feeling pain at the grocery store as food prices rose 10.8% in August compared to the same period a year ago – the fastest rate since 1981.

In a note Friday, RBC said it expects the headline inflation rate for September to drop to 6.7% when it is released next week.

However, the bank’s economists said core consumer price inflation, excluding food and energy, could rise slightly.

Andrew Grantham, senior economist at CIBC Capital Markets, said in a note that he expects inflation in Canada to show bigger signs of slowing than in the United States, largely due to the how housing costs are calculated.

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“However, a rebound in oil prices and widening refining margins led to a further increase in gasoline prices in October, which will lead to a further acceleration in headline inflation for at least another month,” he said. he wrote.

The Bank of Canada will release its latest economic forecast and its next interest rate announcement on October 26th.

RBC economist Claire Fan said in an interview that she expects a half-percentage-point increase provided there are no “surprises” in the data. inflation or next week’s trade outlook survey.

The Bank of Canada offered a huge interest rate hike of three-quarters of a percentage point in September, after raising it a full percentage point in July.

Earlier this week, the IMF provided its outlook for the Canadian economy.

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The financial agency said Canada is now expected to grow by 3.3% this year, compared to the 3.4% growth in the July forecast, while growth for 2023 is expected to reach 1.5%, in down from a previous forecast of 1.8%. .

The IMF expects further rate hikes in 2023, echoing the Bank of Canada.

The report indicates that the Canadian economy is experiencing excess demand, despite the deteriorating medium-term outlook, which is also in line with the view of the Bank of Canada.

Last week, the Canadian economy recorded a slight increase in employment in September, suggesting that the labor market is still exceptionally tight, with the unemployment rate for the month falling to 5.2%, from 5, 4% in August. The economy added 21,000 jobs.

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Meanwhile, the IMF and Canada Mortgage and Housing Corporation are both warning of a possible recession in the near future, joining a chorus of private sector economists.

RBC economists now forecast a “moderate recession” as early as the first quarter of next year, but expect unemployment to be “less severe” than previous downturns.

“We expect it to last around two quarters,” Fan said.

“And a ‘mild recession’ in the sense that a 1.7% increase in the unemployment rate, if you put it in historical context, is not a huge increase. It’s not an incredibly serious slowdown that we’re looking for.

The greenback is also on Macklem’s radar as the Canadian dollar continues to lag, he said, adding that if the situation persists, the central bank will have “more work to do on rates.” of interest”.

The Canadian dollar was trading at 72.17 US cents on Friday against 72.43 US cents on Thursday.