OTTAWA (Reuters) - Bank of Canada Governor Tiff Macklem said on Wednesday that interest rates might be at their peak, given excess demand has vanished and weak growth is expected to persist for many months.
The Bank of Canada (BoC) - seeking to control soaring inflation - hiked rates 10 times between March of last year and July 2023, pushing them up to a 22-year high of 5.00%. The inflation rate, which spiked to more than 8% last year, eased to 3.1% in October but is still above the bank's 2% target.
"This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability," Macklem told the Saint John Region Chamber of Commerce in the Atlantic province of New Brunswick.
"We expect the economy to remain weak for the next few quarters," he added. "The excess demand in the economy that made it too easy to raise prices is now gone."
Macklem reiterated that the bank was prepared to raise rates again if needed.
Analysts and money markets expect that the bank's next move will be to cut rates by the middle of next year.
Responding to questions after his speech, Macklem said that the BoC can begin lowering interest rates when inflation is on a clear path to the 2% target, but "right now, it is not time to start thinking about cutting interest rates".
When the BoC's policy-setting governing council last met and announced on Oct. 25 that rates would remain on hold, some members thought another increase in borrowing costs would be needed, according to a summary of their deliberations.
"Our view is that further economic weakness will be seen over the remainder of this year and early in 2024," said Royce Mendes, head of macro strategy at Desjardins Group, after the speech. "That will be enough to prompt rate cuts in the second quarter of 2024."
Macklem spoke a day after the government released its Fall Economic Statement, which included new spending measures aimed at providing more affordable housing. It said deficit spending would be much higher than previously forecast in coming years, with debt coming down more slowly.
In recent months, Macklem has said monetary and fiscal policy should be rowing in the same direction to bring down inflation.
In his speech on Wednesday, Macklem recognized the impact of restrictive monetary policy.
"Higher interest rates are squeezing many Canadians, but these rates are relieving price pressures," Macklem said.
"To return to low inflation and stable growth in the years ahead, we need these higher interest rates and slow growth in the short term," he added.
On Nov 9, the bank said the era of super-low interest rates was likely over and warned businesses and households to plan for higher borrowing costs than they have been used to in recent years. Some 60% of mortgage holders have yet to renew their home loans at higher rates, the BoC says.