The Bank of Canada will have no choice but to raise interest rates if high energy prices and inflation become persistent, central bank governor Tiff Macklem told MPs on the House of Commons’ finance committee on Monday.
Macklem's Core Message
Macklem used his appearance at the committee to reiterate his core message: That the Bank of Canada is monitoring the Iran war’s impact on inflation, and it is prepared to do anything necessary to prevent persistent inflation if energy prices stay high.
“The Bank of Canada is committed to keeping inflation close to the two per cent target over time. However, uncertainty is unusually elevated, and there are many possible outcomes. Monetary policy may need to be nimble,” Macklem said in his opening remarks on Monday.
Ready to Respond
“As the outlook evolves, we stand ready to respond as needed,” he added. That response may include interest rate hikes in the near future if inflation starts to bleed through to other goods and services, he said.
For now, inflation seems to be contained to energy prices and core inflation remains relatively anchored, he noted.
“What we don’t want to see is, particularly, if the price goes higher and stays high. There’s a risk that those higher energy prices start to feed into other goods and services, and then those feed into yet more goods and services, and pretty soon, a one-off increase in the price level starts to become ongoing increases in price level or generalized inflation,” Macklem said later in his testimony.
“I understand high interest rates are not going to be great for most Canadians. The alternative is to let inflation get out of control and become entrenched. That hurts everybody even more,” he emphasized.
Context of the Testimony
Macklem’s testimony came after the central bank held its policy interest rate at 2.25 per cent for the fourth consecutive time on Wednesday, while warning that the conflict in the Middle East has added significant uncertainty to Canada’s economic outlook.
Inflation had been close to two per cent for over a year but rose to 2.4 per cent in March after slowing to 1.8 per cent in February. The Bank of Canada’s base-case forecast is that inflation will peak in April at about three per cent before returning to the two per cent target in early 2027, but that is assuming global oil prices decline.
Consumer Expectations
Data from a special Bank of Canada survey on consumer expectations, which was conducted after the Iran war started in late February, also suggests that most households expect the war to weaken the Canadian economy and raise prices.
The central bank said in its latest Monetary Policy Report, however, that there is little evidence to suggest that higher energy prices have already fed through to other goods and services.
Still, Macklem acknowledged that inflation is affecting every Canadian, but reiterated that the central bank cannot control food and energy prices. What the Bank of Canada can control, he said, is ensuring that inflation doesn’t become persistent.
