‘We have to cut it’: Bank of Canada’s Tiff Macklem speaks candidly to the Star on how he’s going to get inflation under control
Inflation is the talk of the nation. Bank of Canada Governor Tiff Macklem told the House Finance Committee on Monday that he expects the Bank of Canada to consider another hike of 50 basis points (half a percentage point). in its next political decision in June.
It comes after the latest inflation data released last week showed the consumer price index rose more than expected to 6.7%, its highest level in three decades.
The report came after the central bank raised its benchmark rate by 50 basis points on April 13 – the first time in more than 20 years that it was raised so much in one fell swoop.
Prices are rising for many reasons: government spending due to the pandemic, distorted supply chains and rising commodity prices due to Russia’s invasion of Ukraine – not to mention the low interest rates that helped fuel an ultra-hot real estate market.
Like other central banks, the Bank of Canada is trying to get inflation under control, restoring price stability in one of the most complex economic environments in memory. And he is promised to do so “with force” if necessary.
We recorded our conversation with Macklem on April 18, two days before the latest inflation figures were released.
Welcome Governor. Thank you so much for taking time for us today.
Nice to be here, Howard.
First, I want to know a bit more about you. What drew you to economics?
Well, it sounds a bit ironic now, but I grew up in the 1970s when the big problem was inflation. Inflation combined with high unemployment – a problem we don’t have now. As a teenager watching the news, reading the papers, everyone seemed to be really angry and inflation just seemed to rip people off. There have been many strikes and there seemed at the time like inflation just somehow landed from outer space. I went to college curious about it and well, one thing led to another and I was kind of drawn to economics. And then I was in college and lucky enough to land my first job at the Bank of Canada. I’ve been to a few other places since, but I always come back to the Bank of Canada.
Very well. Well, let’s come to the Bank of Canada. For some people, it’s probably a mysterious place. I mean, you sign the money, you set the interest rates. But what should people really know about what you do at the Bank of Canada?
Central banks have two main purposes. The former is not a very friendly name. We call it “lender of last resort” or “market maker of last resort”. What are they talking about? Credit is the lifeblood of a modern market economy. And from time to time, the markets freeze. They panic and the credit is frozen. And when that happens, it’s really dangerous. This means you cannot get a mortgage. Your business cannot obtain working capital to purchase inventory. You can’t get a car loan. You cannot get a student loan. And if we let that persist, everything will stop. And that’s at the heart of why you have a central bank to provide liquidity in these panic situations.
We’ve actually had two in the last 15 years, the global financial crisis in the wake of Lehman (Brothers collapse). The markets panicked. They froze. And central banks – the Bank of Canada – central banks around the world stepped in on a large scale to provide liquidity and restarted markets. And then at the start of the pandemic, the same thing happened. There was a huge dash for cash. The Bank of Canada and other central banks had to intervene on a large scale and provide liquidity. Fortunately, in fact, the functioning of the market market was restored quite quickly and we ended all these facilities. The other thing we do and we do every day, and you mentioned it in your introduction, is we maintain value for money, price stability.
Is it the link with inflation?
Exactly. And right now, as you point out, inflation is too high. We have to bring it down. We need to bring it back to our 2% target.
I quoted “with force” in the introduction. You will attack inflation “with force” if necessary. Can you define “with force?”
I will be frank. We were surprised by the strength of this recovery. I mean, we’ve been through a lot in the last few years. We’ve had the deepest, sharpest recession in history and we’ve had the quickest, fastest recovery we’ve ever seen. And now, you know, we need to normalize monetary policy pretty quickly. So when we say strong, it means we’re going to make sure we stay ahead of the game and put in place the monetary policy necessary to get inflation to start to come down and back to our 2% target.
And what is the risk that you walk too fast and cause an economic contraction?
It’s certainly something we’re very aware of, and look, there are risks on both sides. If we move too slowly, inflation does not come down. It’s starting to fit into people’s expectations. People are starting to think — and that’s what happened in the 1970s — that inflation is here to stay, and if that happens it becomes much more expensive to get it back to the 2% target . In fact, it would probably take a real downturn, maybe even a recession, to do that. This is the lesson of history. So normalizing fairly quickly, right now the economy is strong. It can handle higher interest rates. It actually needs higher interest rates to moderate spending to better balance supply and demand in the economy. And so inflation is coming down. So if you look at our own forecast, we have good growth with lower inflation.
So how do we know we won’t have the stagflation you heard about when you were a kid in the 70s?
Well, look, we can’t rule anything out for sure, Howard, but we’ve had these rock-bottom interest rates for over a dozen years. I think that’s unlikely to change drastically overnight and when you look at some of the big forces in the economy, they’ve contributed to these lower interest rates. And it’s not just in Canada, it’s global. We may return to a world where inflationary pressures are more sustained. We don’t know for sure, but I think if it changes, it will change quite gradually and we can adjust.
This interview has been edited for length and clarity.
Listen here or subscribe to Apple podcast, Spotify or wherever you listen to your favorite podcasts.
JOIN THE CONVERSATION