MNI INTERVIEW2:Macklem Sees Time To React To Neutral Rate Rise

Bank of Canada Governor Tiff Macklem told MNI that while there’s evidence the neutral interest rate is grinding higher, the pace of change will be slow enough for the central bank's existing monetary policy regime to handle.

Reasons to believe the neutral rate is climbing include the retirement of the Baby Boom generation, fading globalization, costs linked to climate change and increased security concerns, he said in an interview after Wednesday's interest-rate announcement.

“The neutral rate’s probably not lower. It might be higher. I think it’s more likely to be higher than lower, but I think there’s a lot of uncertainty about that,” Macklem said in an interview. The Bank next month will update its current estimate that the nominal neutral rate is between 2% and 3%.

“When the inflation targeting framework was designed, we knew there were these fundamental uncertainties, and that was actually one of the reasons why Canada and many other countries moved away from targeting intermediate targets and just targeting the thing that you really want to control and that’s inflation, and adjusting along the way as there are structural changes in your economy, to make sure you get inflation back to 2%,” he said.

NOT LOSING SLEEP

Officials worldwide are debating whether neutral interest rates are climbing and whether that could mean monetary policy isn't as restrictive as thought. The BIS said Monday central banks should be cautious about recent evidence that natural interest rates have risen following the pandemic and instead look to more concrete observed inflation evidence.

“On the things that keep me up at night, the possibility that the neutral rate is drifting higher is not my biggest worry. Because if the neutral rate is changing, it must be changing gradually. And if it’s changing gradually, our inflation targeting framework is well designed to cope with gradually evolving uncertainties like the neutral interest rate,” Macklem said.

The Bank will also continue reviewing extraordinary tools deployed during the pandemic such as QE, he said. (See MNI INTERVIEW: Senator's BOC Bill Seeks Rigor Not Rebuke)

"(Bank Deputy) Toni Gravelle gave a very good speech … reviewing our experience with the various exceptional liquidity facilities we put in place to restore market functioning at the outset of Covid when fixed income markets completely froze,” Macklem said. “It does do a good job of highlighting what we think worked well, what we learned, and what markets can expect from us going forward if we were into a similar situation.”

Macklem said that about halfway through his seven-year term he hasn't thought about whether he wants to seek a second one. After working to stabilize the economy he hopes the second half of his term can focus on returning to normalcy.

CANADIAN RESILIENCE

"It could have been a lot worse, and I think the resilience of Canadians, the resilience of Canadian business, the policy response, here at the Bank of Canada and by various levels of government, it worked,” he said. “Did we get everything right? No. But we got a lot of things right, and I think Canadians, the Canadian economy is a lot better for it.”

"We hopefully are going back to some sort of normal, but the new normal is not going to be the old normal. The reality is global conflicts are more elevated, security globally is a bigger issue, geopolitical tensions are not going away.” (See MNI: War, Sticky Prices Dent Canadian Exporter Confidence- EDC)

Asked about the possibility of a second term in office, Macklem said: “I am thinking about what are the next three and a half years looking like, I’m not thinking about what’s happening after that."