Is an interest rate increase on the horizon? By: Editorial Posted: 7:00 PM CDT Wednesday, May. 10, 2023

Opinion

Bank of Canada Governor Tiff Macklem no longer expects Canada’s inflation to fall to his two per cent target of its own accord, he told the Toronto Region Board of Trade last week. Canadians are going to have to change their ways, he warned, or else he’s going to have to resume cranking up interest rates to stop inflation in its tracks.

The central bank had been forecasting that inflation would decline to three per cent per year by the middle of this year and decline further next year to reach the official two per cent target. We’re already in May and the annual inflation rate is still 4.3 per cent to 4.7 per cent, if you leave out volatile food and energy prices.

Governor Macklem was pleased that the year-over-year inflation rate had declined to 4.3 per cent from its peak of 8.1 per cent last June, but the difference in those two figures is partly an optical illusion, rather than a reflection of the forces at work in the Canadian economy. Inflation two years ago was held in check by the pandemic in a way that does not apply now.

The apparent decline in inflation, therefore, reflects some mix of the bank’s interest rate rises and the passing of the pandemic era. It does not predict what is likely to happen next in Canada’s consumer price performance.

The labour market needs to be rebalanced and wage growth needs to moderate in order to bring inflation down, the governor said last week. This is a polite way of saying unemployment needs to increase, employers need to be less eager to fill their job vacancies and workers need to expect lower pay. But how likely are these things when employers need more workers and families are having trouble keeping up with rising consumer prices?

The labour market needs to be rebalanced and wage growth needs to moderate in order to bring inflation down, the governor said last week.

Canada’s latest labour force survey showed that employment rose by 41,000 positions in April, leaving the national unemployment rate steady at the exceptionally low five per cent level where it has been since December. The same survey showed that average hourly wages had risen by 5.2 per cent in a year. No sign there of labour market rebalancing or wage growth moderation.

The governor also wanted businesses to slow the pace and size of their price increases. He wanted Canadians generally to stop expecting prices to keep on rising and start believing that the bank’s forecasts of declining inflation will come true. Canadians would no doubt be happy to do that, but they will need some reasons to disbelieve the evidence of their eyes and believe the governor’s forecasts instead.

If Canadian businesses and consumers don’t change their behaviour and their thinking in the way Mr. Macklem advises, he is going to have to resume the steady rise in interest rates that he began in March 2022 and stopped in January.

If Canadian businesses and consumers don’t change their behaviour and their thinking in the way Mr. Macklem advises, he is going to have to resume the steady rise in interest rates that he began in March 2022 and stopped in January.

Other central banks continued raising rates when Canada in January announced a pause at 4.5 per cent. The Federal Reserve in the United States pressed on upward to 5.25 per cent last week. The Bank of England and the European Central Bank have continued raising rates during the Canadian pause.

Governor Macklem’s plan to let inflation fix itself has not worked yet. He has warned the public he no longer expects that it will. Canadian borrowers should expect the upward march of interest rates to resume, perhaps at the June 7 rate-setting meeting.