That was one of the main points of a wide-ranging interview with Bank of Canada Governor Tiff Macklem on Thursday, in which the central banker said he understands the pain Canadians feel about their finances right now. But he is more determined than ever that the bank’s actions to stabilize prices will be worth it in the long run. Facing price increases the likes of which we haven’t seen in a generation for everything from food, gas and a roof over their heads, “people are frustrated, they feel helpless,” Macklem said. “We don’t want to make this harder than it has to be, but at the same time … if we don’t do enough, if we’re half-hearted, Canadians will have to continue to endure high inflation that hurts them every day.”
Inflation is a global problem
After dipping in the early days of the pandemic, inflation rates in Canada and around the world have soared this year to their highest levels in decades as fractured supply chains, the ongoing pandemic and imbalances between supply and demand for nearly everything have lead to prices rising at double-digit rates. Macklem and other central bankers are raising their lending rates — which makes borrowing more expensive — in an effort to reduce demand enough that supply can be met. That goal is to restore the price stability that Canadians crave, but it has not been — and will not be — a painless process. “We’ve got to get things back to normal and so yes, we’re raising rates quickly and I understand that’s a little counterintuitive to Canadians,” he said. “Their rent is going up, their groceries are more expensive, gas is more expensive, and now the cost of borrowing is more expensive,” he said, which is why adding short-term pain from higher borrowing rates is the only way out. “How does that work? … It makes anything you buy on credit more expensive. So you pull back and that helps balance the economy and that will ease those price pressures.” An overinflated housing market was previously a major driver of inflation, but the bank’s actions so far have raised the cost of carrying mortgages enough that much of that excess demand has now disappeared. However, the labor market remains tight, with job vacancies high and wages rising at the fastest pace in decades. Last week, new numbers from Statistics Canada showed the country added 108,000 jobs last month. That’s great news for anyone who has found a job or is looking for one, but the strong demand for labor makes Macklem’s job even harder because it increases wage gains and consumer spending, which the bank would like to calm. “The job market is very tight,” Macklem said. “This is a symptom of an economy that can’t keep up … it can’t produce all the goods and services that Canadians want to buy.”
Possible mild recession
That’s why he says Canadians should expect even more rate hikes on top of the six that have already happened this year. Even if that means the economy changes direction and starts losing jobs on a monthly basis, for a while. “The unemployment rate will go up,” he said. “We’re not talking about high unemployment rates that we’ve seen in previous recessions, but it’s going to rise.” That R word – recession – is also on the minds of many Canadians right now, as there are fears that the bank’s actions may inadvertently set off at least one mild one. While the bank’s short-term forecast says a few quarters of small growth is about as likely as a slight contraction, it acknowledges a mild recession is on the table. “We actually think growth will be close to zero for the next few quarters, until … about the middle of next year,” Macklem said. If it happens, a mild recession may be the price the bank is willing to pay to reduce inflation. But on the other side of this slowdown, Macklem promised, things will be better and growth and prosperity will return. “Monetary policy is working,” he said. “It takes time to work and we have to go through a difficult adjustment, but it is working and we will get out of it.”
