MNI INTERVIEW: BOC's Macklem Says Can Move Rapidly If Needed

Bank of Canada Governor Tiff Macklem told MNI he could adjust policy rapidly if economic conditions shift abruptly, although his base-case projection suggests conditions for lower borrowing costs might not emerge until later this year.

"What nimble means is if the situation changes rapidly, we may need to respond rapidly," he said in an interview at the central bank's Ottawa headquarters after holding the key rate at 5% on Wednesday. At the rate decision he said it was too soon to consider a cut given upside inflation risks.

“You set out a forecast but as we’ve learned over the last three or four years, the situation can change rapidly. And we’ve demonstrated going into Covid and coming out of Covid, if the situation changes quickly we’re prepared to change course quickly,” he told MNI. “Coming back to today’s decision, I don’t think that’s the situation we’re in."

The Bank projects inflation of about 3% over the first half of this year, with it slowly moving back to the 2% target sometime in 2025. While headline inflation slowed more than economists predicted to 2.9% in January, the rate decision noted core prices are still above the Bank's 1% to 3% target band.

MUST SEE CORE PROGRESS

"We need to see further and sustained easing of core inflation to consider lowering interest rates,” Macklem said when asked about a December speech calling 2024 a year of transition. (See MNI INTERVIEW: Investors Jump Gun On BOC Cuts- Ex Deputy Lane)

“If you look at the forecast that we’ve laid out, those conditions should be materializing over the course of the year,” Macklem said. “That was really the sense in which yes, this should be a year of transition, we should be getting back pretty close to 2% inflation by the end of the year, growth should be picking up, and assuming inflation is coming down, yes, we can certainly be discussing lowering interest rates.”

The Bank raised rates 10 times through last year to the highest since 2001 and in recent decisions the debate has shifted from the possibility of another hike to an assessment of how long restrictive policy is needed. Most economists see the first cut in June and perhaps a few further moves by year-end. (See MNI INTERVIEW: Last Thing BOC Wants Is Cut And U-Turn- Stillo)

The next decision in April will be informed by a fresh quarterly economic forecast incorporating more key data on inflation expectations, how aggressively companies are raising prices and evidence of easing wage growth, he said. Even setting aside the risk of new global conflicts, domestically "there is a risk that inflation stalls," Macklem said.

RATE STATEMENT STILL TOPS

While Wednesday's decision outlined progress on inflation, there are still broad price pressures and "what we’re looking for is further progress and consistency across those indicators,” Macklem said.

The Bank this year changed its communications to hold a press conference at every decision and to release the opening statement at the same time as the rate decision. Macklem said that while the opening statements have grown in prominence from the rather sparse ones of a decade ago, the rate decision remains no less important.

“The press release -- that is the policy decision. That’s number one,” Macklem said. “The reason to release the opening statement at the same time as the press release is the opening statement provides the opportunity to provide a little more color around the press release.”