MNI: Transcript of Interview With BOC Governor Tiff Macklem

Following is a transcript of an interview with Bank of Canada Governor Tiff Macklem Wednesday following an interest-rate decision, with some edits made for clarity: (See MNI INTERVIEW: BOC's Macklem Says Can Move Rapidly If Needed and MNI INTERVIEW2:Macklem Sees Time To React To Neutral Rate Rise)

Q: Canadians are pining for an interest-rate cut. In your speech in Toronto in December you said: “In a world with increased macroeconomic volatility, we are also conscious that we may need to be nimble, and we should be humble about our forecasts.” The word “nimble” seems to as open the door to a pleasant surprise if things turn out well. Is that possible?

A: “I think what nimble means is if the situation changes rapidly, we may need to respond rapidly.”

“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.”

“Coming back to today’s decision, I don’t think that’s the situation we’re in. The data has been coming in largely as we expected back in January, in fact even if you go back all the way to last summer, I mean we expected inflation was going to come down to about three percent last summer and it did.”

“Since then we’ve been bumping along, we think we’re going to bump along for a little further, and then we think we’re going to start to see more, further easing in inflation.”

Q: You’ve also called 2024 a year of transition. Is there any plausible scenario where you don’t have the chance to cut interest rates this year, barring some kind of global catastrophe?

A: “Let’s talk about the base case scenario. I think the base case scenario if you go back to our January forecast is weak growth in the near term, growth picking up in the second half of the year. Headline inflation probably staying around three until about the middle of the year and then moving down.”

“What we’re going to be looking for on the inflation front, importantly, is core inflation. Core inflation is running above our measure, above total CPI inflation.”

“We want to see, we’re expecting to see further easing in core inflation and that is certainly what we’re going to be looking for. And what we’ve said is that we need to see further and sustained easing of core inflation to consider lowering interest rates.”

“If you look at the forecast that we’ve laid out, those conditions should be materializing over the course of the year.”

“That was really the sense in which yes, this should be a year of transition, we should be getting back pretty close to two percent 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.”

“Are there risks around that? Yeah. I’m glad you’ve ruled out the really bad (global) risks.”

“Looking more domestically, there is a risk that inflation stalls. This decline of inflation stalls, with inflation still materially above our target, and when you look at the various indicators, we’re seeing progress, and I think the press release, I think the opening statement was trying to mark some progress.”

“The economy looks like it’s in excess supply, we don’t still have demand pressures. Total CPI inflation has moved down, core has moved down. The share of CPI components rising above 3%, that has come down.”

“Core, the breadth, it’s still too high, but it’s moving in the right direction. We’re starting to see some evidence that wage growth may be easing. We’re going to get some other important bits before we get to April. We will get new information on inflation expectations, on corporate pricing behavior. What we’re looking for is further progress and consistency across those indicators.”

Q: Does a potential rise in the neutral interest rate limit the scope for lower rates?

A: “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.”

“We use a range of different approaches to try to estimate what the neutral rate is, as you’re well aware it’s not something we can observe directly.”

“When we updated our analysis last April, the overall conclusion was there was no compelling evidence that the neutral rate had moved up.”

“That’s based on the data we have, if you look forward on the data we’re going to get, yes there are some reasons to believe that it could go up.”

“Some of the factors that I think have held it quite low, globalization, demographics, the Baby Boomer generation has really moved into retirement, well, I’m at the end of the Baby Boomer generation, I’m still working, but a good part of the baby boomer generation is moving into retirement.”

“Globalization is at a minimum shifting if not reversing.”

“Clearly climate change is going to involve… if we’re going to get to net zero there’s a lot of investment that has to happen, that’s going to be expensive.”

“Security is a bigger issue, that’s going to add new costs.”

“There are some reasons to believe that the neutral rate could be going up.”

“We will be updating our estimates in April. I assume that work is underway but I haven’t seen anything yet.”

“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.”

“If the neutral interest rate is higher than we think, that means monetary policy is not as restrictive as we think and that means inflation is not going to be coming down consistent with our forecast. I mean so far inflation has been coming down consistent with our forecast. And if r-star is changing it’s probably changing pretty gradually, you’ll start to see inflation’s not coming down quite as much as you think, and you’ll adjust.”

“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 two percent.”

Q: Are there any things you'd like to keep or change related to the extraordinary tools you deployed during the pandemic, many for the first time after developing them post-2008?

A: “There’s no question the Covid experience is like nothing else any of us have experienced, and Canadians had to get very inventive. Businesses had to get very inventive, policymakers had to get very inventive.”

“And yes we did a number of things we’ve never done before. And it is going to be important to reflect back on what we’ve learned. And that is well underway.”

“If you look at my year-end speeches, both last year and the year before I did reflect broadly on a number of lessons learned. 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.”

“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.”

“We’ve also reviewed our forecast errors, inflation forecast errors, and we are currently doing work to review some of the other elements, the effectiveness of forward guidance, the effect of quantitative easing. I think it is going to be hard to come to definitive conclusions, but I think it is important that we all learn from this.”

“We can also look across countries, many countries did this, some did it in different ways, what worked, what didn’t work.”

“And I also think as we get fully through this cycle, inflation gets back, the economy is recovering, we’ll need to look at this with the benefit of hindsight.”

Q: Do you have any thoughts about whether you would stand for a second term as Governor?

A: “Well, look I’m halfway through my term. It has certainly been, the first three and a half years of that seven-year term have certainly been action packed.”

“When you go back to the darkest days of the pandemic-- I mean when I started GDP was roughly minus 15 percent, there were more than three million Canadians unemployed."

“It has been a long way back and obviously the other side of it has been we are coping with the biggest increase in inflation we’ve had in thirty years. Having said that, I think if we had all been told, if I had known... where we’d be today, I think that would have been some relief. 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.”

“Did it work perfectly? No. It didn’t work perfectly. 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.”

“In terms of the next three and a half years, well I hope they are less defined by crisis. I hope we don’t have a new big challenge to deal with as a country, and I think in terms of some of the priorities which I mentioned in some of those year-end speeches, 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.”

“We’re not going to get the big benefits of globalization that we’ve got in the past. I think supply shocks I think will probably be a bigger feature going forward than they were.”

“I am thinking about what are the next three and half years looking like, I’m not thinking about what’s happening after that.”

Q: The Bank has never had a non-white or female Governor. Will you press the government on that issue when it comes to your successor?

A: “I’m not going to appoint the next Governor, the board of directors of the Bank of Canada with the approval of cabinet will do that. So I will leave that to their best judgement.”

“Certainly within the Bank, an emphasis on diversity, equity, diversity and inclusion is very important.”

“The economics-finance profession is too male dominated, and I certainly hope that we see more diversity in the profession.”

“Here at the Bank of Canada, our primary focus is really hiring, developing men, women, diverse candidates. You want that diversity in your institution. It’s the right thing to do but it’s what brings new ideas.”

“It is important that the Bank of Canada looks like Canadians. We’re a Canadian institution. Part of our legitimacy, we need to look like Canadians. So, it is a priority, we are making progress, and it’s going to be very important that we continue to make progress. I hope from the outside you can see that we’re making some progress, I think it’s reasonably visible. Could it be faster? Sure.”

Q: You’ve moved to press conferences with each rate decision and your opening statement comes out alongside the rate decision. Should investors see any hierarchy between the two documents?

A: “The press release, I mean that is the policy decision. So, yeah, I mean that’s number one.”

“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.”

“The press release is really `Here’s our forecast, or here’s how things have evolved relative to our forecast. Here’s the decision and here’s what’s on our mind going forward.’”

“The opening statement is opportunity to unpack a little more. Okay, what did we make of this, why did we think this, what were the main factors that weighed on that judgment, have the balance of risks shifted. And I think over time the opening statement has become a more important document.”

“If you go back you know a decade, the opening statement was very short and largely repeated what was in the press release.”

“Now it’s, for better or worse, it tends to be a bit longer. But I think it is the opportunity to really speak to how is Governing Council seeing this, as opposed to just what’s happened, and how has that influenced the decisions we’ve taken.”

“So I do think the opening statement has become a more important document, and that really led to the idea that well, rather than giving you in the lockup the press release and then when you come to the press conference you get the opening statement, why don’t we just give them to you together, so you’ve got both the decision and the main bits of data and the forecast that were critical to that decision with more of the analysis, thinking of Governing Council that went into it.”