2024-10-25 19:17:00
(Ottawa) Bank of Canada Governor Tiff Macklem says the world has become more exposed to supply shocks that create more inflation risks, but the central bank is better positioned to deal with them face now that inflation is under control.
However, he added that monetary policy’s ability to stabilize output in the face of supply shocks is “somewhat limited.”
“This speaks to the role of fiscal policy, and for policy to play that role around the world, countries need to rebuild their fiscal reserves so that they can play that role post-pandemic,” he said.
Mr. Macklem spoke to reporters from Washington, where he was attending meetings of the International Monetary Fund.
He talked about the need to increase productivity, or the amount of work accomplished in a given amount of time.
He argued that productivity is a long-standing problem in Canada, which poses a risk to GDP and can add to inflationary pressures.
At the meetings, Macklem said officials discussed “how increasing productivity growth will be critical to supporting non-inflationary growth and economic resilience.”
“We are all very aware that we could face further shocks,” he said. The world is more turbulent and we need analytics and tools to manage this uncertainty. »
The Bank of Canada cut its key interest rate by half a percentage point earlier this week, its fourth cut this year, as inflation slowed below the central bank’s 2% target. .
The cut took the policy rate to 3.75%, and the central bank signaled the possibility of further cuts in the coming months.
“We are back to low inflation,” Macklem said, adding that one factor in the central bank’s decision was the need to keep inflation around 2%.
Lower interest rates are expected to contribute to a recovery in demand, gradually absorbing excess supply in the economy.
Tiff Macklem, Governor of the Bank of Canada
Mr. Macklem also said the Bank of Canada is digesting Thursday’s announcement by the federal government to reduce immigration targets for the coming years.
He said the central bank would monitor how population growth fares against its assumptions.
“There is some uncertainty about exactly how quickly these things are happening,” he said.
Population growth affects both demand and supply, Macklem noted.
“What is more sensitive to your assumptions about population growth are your GDP forecasts,” he said. We are digesting this […] We’ll take a close look at the actual trajectory we’re seeing in population growth, and we’ll revise our forecasts as we become more certain about exactly what’s going to happen. »
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Interview with Tiff Macklem, Governor of the Bank of Canada
Interviewer: Thank you for joining us, Governor Macklem. Recently, you mentioned that the world has become more exposed to supply shocks. Can you explain what you mean by that?
Macklem: Absolutely. The recent global disruptions have shown us that supply shocks—unexpected events that disrupt supply chains—can create significant inflationary pressures. These shocks can arise from various sources, including geopolitical tensions and natural disasters. However, now that we have managed to bring inflation under control, the Bank of Canada is in a better position to respond to potential new shocks.
Interviewer: You noted that monetary policy has its limitations in stabilizing output during these shocks. What does this mean for Canada’s economic strategy?
Macklem: It means we need to rely on fiscal policy as well. Monetary policy is an important tool, but we must acknowledge its limits in certain scenarios. I emphasized the need for countries to rebuild their fiscal reserves, especially after the pandemic, so they can effectively support their economies in the face of disruptions.
Interviewer: You also highlighted the challenge of productivity in Canada. Why is this an important issue in the context of inflation and economic resilience?
Macklem: Productivity—essentially, how much work is done in a given amount of time—is crucial for sustainable economic growth. A longstanding problem in Canada, low productivity can hamper GDP growth and exacerbate inflationary pressures. At our recent meetings, we discussed ways to bolster productivity as a means to support stable, non-inflationary growth.
Interviewer: Following the recent interest rate cut, what signal is the Bank of Canada sending to the markets and the public?
Macklem: Cutting the key interest rate to 3.75%, our fourth cut this year, reflects our assessment that inflation is slowing and we are moving back towards our 2% target. It’s a balanced approach—while we recognize the importance of keeping inflation low, we also need to be prepared for potential economic shocks in the future.
Interviewer: Governor, in light of increasing global uncertainty, what strategies does the Bank of Canada plan to implement moving forward?
Macklem: We recognize the increasing turbulence in the global landscape. Our approach involves not only careful monitoring of economic indicators but also developing robust analytics and tools to navigate uncertainty. The key is to remain vigilant and flexible in our policies to support economic resilience as we move forward. Thank you for having me.
Ity is a critical factor in driving economic growth without triggering inflation. When productivity increases, it means we can produce more goods and services without increasing costs, which helps keep inflation in check. Canada has faced long-standing productivity challenges, and addressing these issues is essential for fostering non-inflationary growth and enhancing our economic resilience against future shocks. It’s a focus of ours moving forward, as we recognize that improved productivity can significantly bolster our GDP and overall economic stability.
Interviewer: Given the recent interest rate cuts, how does this fit into your overall strategy to manage inflation and encourage economic growth?
Macklem: The recent cut in our key interest rate, which is now at 3.75%, is aimed at stimulating demand in the economy. Lowering interest rates makes borrowing cheaper, which can help absorb excess supply and support a recovery in consumer and business spending. It’s crucial to maintain inflation around our target of 2%, and we’re closely monitoring the trends to decide on any future adjustments. Our goal is to ensure a stable economic environment where Canadians can thrive.
Interviewer: Lastly, how does population growth figure into your economic outlook, especially in light of the federal government’s decision to reduce immigration targets?
Macklem: Population growth is an essential component of both demand and supply in the economy. The recent announcement regarding immigration targets introduces a level of uncertainty. We will be closely analyzing how these changes impact our assumptions regarding population growth, as they have direct implications for GDP forecasts. As we gain more clarity on the actual trajectory of population growth, we will adjust our forecasts and strategies accordingly. It’s all about adapting to the evolving landscape to ensure economic stability and growth.
Interviewer: Thank you for your insights, Governor Macklem.
Macklem: Thank you for having me. It’s crucial that we stay proactive and informed as we navigate these challenges together.