Home Business & Economy Banking & Finance Macklem: Rates will come down but we’re not there yet

Macklem: Rates will come down but we’re not there yet

Benchmark rate held at 5% yesterday | Bank is prepared to 'do more' as required.

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Bank of Canada Governor Tiff Macklem addressed the Calgary Chamber of Commerce on Sept 7, 2023. [livestream]

Thursday September 7, 2023 | CALGARY, BC

by Mary P Brooke, Editor | Island Social Trends | BUSINESS & ECONOMY SECTION

Bank of Canada Governor Tiff Macklem said it straight up about the central bank’s interest rate: “It’s too early to think of interest rate cuts because we’re not there yet,” he said near the conclusion of a nearly one-hour webcasted speech and Q&A in Calgary.

Macklem was addressing the Calgary Chamber of Commerce followed by answering questions presented by the moderator.

Addressing the key question on everyone’s mind, Macklem responded with varying phraseology through the session, but the message was the same: “We’re not there yet, but we’re going to get there,” is another way he responded to households, businesses and governments wondering about when the interest rates will come down.

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Bank of Canada Governor Tiff Macklem took questions from the media following his address to the Calgary Chamber of Commerce on Sept 7, 2023. [livestream]

The Bank of Canada is aiming for 2% inflation (as a mid-point between 1% and 3%). With inflation presently sitting above 3% means it’s not at the target yet — with Macklem explaining that at 3% that means it’s a midpoint between 2% and 4%, which is too high in the Bank’s view.

The latest rate announcement was yesterday September 6, when the bank did not increase the benchmark rate, holding it at 5%.

After 10 interest rate hikes by the Bank of Canada in the last 18 months, most Canadian households and small businesses feel the pressure has become to much. There is very little wiggle room — if any — in household budgets and business operational finances. Today Macklem hinted at the high levels of indebtedness carried by Canadian households, as part of their difficulty with absorbing the shock of higher interest rates and the inflationary activity in the economy.

For those folks, the no increase to interest rates today by the Bank of Canada would be welcome news. The rate remains at 5%. The next rate announcement will come in October 25, and the bank reserves room to increase their central rate further, if required in their view.

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Bank of Canada Governor Tiff Macklem will take questions from the media on Thurs Sept 7, 2023. [Bank of Canada]

The Bank of Canada uses one blunt tool … the raising or lowering of the central bank rate. Banks, mortgage lenders and other financial institutions follow suit — usually only with increases, not decreases.

Macklem was firm today that their approach is working. But he did hint at perhaps reviewing the overall method of assessing risk and making rate decisions. That’s a new tack that hasn’t been heard before.

“The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures,” said the Bank of Canada in their September 6, 2023 news release. Though today Macklem was positive about the range of productivity sectors in the Canadian economy including a “great” natural resources sector, “vibrant manufacturing” and a “big service sector”.

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“Year-over-year and three-month measures of core inflation are now both running at about 3.5%, indicating there has been little recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability,” it was stated by the Bank of Canada today.

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Psychological relief:

Much of the action to manage the rate of inflation is psychological. To give relief at this point may help the economy and the price of everything to settle into a more stable pattern. When businesses expect their interest-carrying costs to keep going up, they generally keep pushing up their prices. This lands hard on consumers — for items big and small once inflation gets into an upward spiral.

Today Macklem did mention that when people are worried about pricing that inflation tends to worsen.

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The impact of higher interest rates has made its way into just about everything in the economy — but most notably affecting the cost of housing, groceries, and insurance. Most people’s income does not keep rising and find it hard to keep up. There are only so many areas of so-called ‘disposable income’ to cut back on.

New normal will be higher than pre-pandemic:

The interest rate in Canada will eventually go down. Macklem said today that he expects that to happen in mid 2025.

But he said it won’t go back to the low rates that were seen between the 2008 Great Recession and the pandemic which hit in 2020. In those years interest rates were nearly close to zero.

Macklem emphasized that rate increases in 2022 were at an “unprecedentedly rapid pace”, going up by 100, 75 and then 50 basis points.


===== RELATED:

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10th Bank of Canada rate increase in 16 months (July 12, 2023)

Eby: Interest rate hikes impacting people who can least afford it (July 11, 2023)

Bank of Canada Deputy Governor draws a crowd in Victoria (June 8, 2023)

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