Bank of Canada on Money Policy and Rates

Remarks byTiff Macklem, at CFA Québec, February 7, 2023

For the full Bank of Canada article, please see this link: https://www.bankofcanada.ca/2023/02/monetary-policy-at-work/

Tiff Maclem Introduction and Conclusion are quoted below


Good afternoon. It’s a pleasure to be here in Québec to speak to you about monetary policy and the economy. As we approach the three-year mark of the COVID-19 pandemic in Canada, we are also entering a new phase in monetary policy.

In 2022, we faced an overheated economy and high inflation, and we responded forcefully, increasing our policy interest rate rapidly. The year ahead will be different. In January, after eight consecutive interest rate increases, we said that we expect to hold the policy rate at its current level, conditional on the outlook for inflation. We are pausing to assess how well our interest rate increases are working to bring inflation down. With inflation above 6%, we are still a long way from the 2% target. But inflation is turning the corner. Monetary policy is working.

That’s what I’d like to talk about today—how, exactly, monetary policy works to control inflation. I’ll outline what we’ve done so far, what the impact has been and what we expect going forward. I also want to talk about the risks and uncertainties that we are facing as we work to get inflation back to target.

Canadians know inflation is high. They see it at the grocery store, when they pay their rent and when they go to a restaurant or on a trip. And they know that we’ve increased interest rates. They see that in higher costs for borrowing—in mortgage rates, lines of credit and business loans.

But it is less obvious how higher interest rates are working to bring inflation down. Since March, we’ve raised the policy rate by 4¼ percentage points. In recent months, inflation has levelled off and has begun to ease. The considerable tightening we’ve done will continue to work its way through the economy, and this will rebalance demand with supply and slow inflation. So how does this work?


It’s time for me to conclude. I’ve given you a picture of how monetary policy works—how our interest rate increases work their way through the economy to slow borrowing, dampen demand and ultimately lower both imported and domestic inflation. We know that the monetary policy tightening we’ve undertaken is hard on many Canadians. Unfortunately, there is no easy way to restore price stability. Monetary policy doesn’t work as quickly or painlessly as everyone would like, but it works. And it will be worth it when Canadians can once again count on low, stable and predictable inflation.

As always, we will be clear and transparent. I want Canadians to understand what we’re doing to fight inflation, how it works and why it matters. I also want to be clear about the uncertainties we face—the lingering effects of a global pandemic, a war in Europe and broader geopolitical tensions.

There are risks to our projection. The biggest is that global energy prices could increase, pushing inflation up around the world. We’re also concerned that inflation expectations could remain elevated and increases in labour costs could persist. If these upside risks materialize, we are prepared to raise interest rates further to return inflation to the 2% target.

There are downside risks to our projection as well. Global growth could slow more sharply than we expect, and financial vulnerabilities could amplify the slowdown. Canadian households could pull back more than we expect as they adjust to higher interest rates.

Overall, we view the risks around our inflation forecast as balanced. But with inflation still well above our target, we continue to be more concerned about the upside risks.

Inflation will fall in the months ahead, and we will be watching for further evidence that demand and supply are rebalancing so that inflation heads all the way back to the 2% target. We will continue to explain what we are seeing, what we are doing and what Canadians can expect from us. We are resolute in our commitment to restoring price stability for Canadians.

Thank you.


Patricia Dent

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