Bank of Canada Governor Tiff Macklem said the central bank may have to raise interest rates further, given inflation may stay high for some time.
That’s according to prepared remarks the governor is delivering before the Calgary Chamber of Commerce on Thursday.
His speech comes one day after the central bank decided to hold its key interest rate steady at five per cent, as signs of a slowing economy grow.
Statistics Canada reported last week the economy shrank in the second quarter, while the unemployment rate has been rising for three consecutive months.
However, Macklem said on Thursday that the central bank’s governing council agreed rates may need to rise again.
“In trying to balance the risks of under- and over-tightening, governing council decided yesterday to keep the policy rate at five per cent, and agreed there may be a need to raise the policy rate further if inflationary pressures persist,” Macklem said.
Gas prices may push up inflation
Canada’s inflation rate was 3.3 per cent in July, but the Bank of Canada expects inflation to flare up in the coming months before declining again.
Macklem spends a considerable amount of time in his speech defending the central bank’s two per cent inflation target. Although inflation may seem close to the target, he said, reaching two per cent is crucial to maintaining predictability and stability in the economy.
Macklem says the slowing progress on getting inflation down either means previous rate hikes need more time to take effect, or interest rates aren’t high enough yet.
The central bank is looking for evidence that inflation is not only falling, but that large price increases become less broad in the economy.
For that to happen, Macklem said demand in the economy needs to continue to slow.
“But I want to be clear — we are not trying to kill economic growth,” Macklem said.
Instead, the governor said the best way the central bank can support the economy is by making sure inflation comes back down to the two per cent target.