Good evening. I am pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcements and the Bank of Canada’s Monetary Policy Report (MPR).
Last week, we raised the key interest rate by 50 basis points to 3.75%. This is the sixth consecutive increase since March. Quantitative tightening continues and complements the increase in base rates. We also expect our base rate to increase further. How much further will depend on how monetary policy works to slow demand, how supply challenges are resolved and how inflation and inflation expectations respond to this tightening cycle.
Our results last week reflect a number of considerations.
First, inflation in Canada remains high and broad-based, reflecting large increases in both the prices of goods and services. Inflation has come down in recent months, but we have yet to see a general decline in price pressures. About two-thirds of the components of the consumer price index (CPI) have increased by more than 5% over the past year. And rising prices for essentials like groceries and rent are hitting low-income Canadians hard.
Second, and related, the economy is still in excess demand—it’s overheated. Job vacancies have declined from their peak but remain high, and businesses continue to report widespread labor shortages. With the economy now fully reopened, households want to enjoy many of the close-knit services they’ve missed, but businesses can’t keep up and we’ve seen service prices rise rapidly.
Third, higher interest rates are beginning to affect growth. This is especially evident in parts of the economy that are sensitive to interest rates, such as housing and spending on big-ticket items. But the effects of higher rates will take time to ripple through the economy.
Fourth, there is no easy way to restore price stability. We need the economy to slow down to rebalance demand and supply and relieve price pressures. We expect growth to stall over the next few quarters—in other words, growth will approach zero. But once we get through this slowdown, growth will pick up, our economy will grow strong, and the benefits of low and predictable inflation will be restored.
To put this in numbers, growth in gross domestic product (GDP) is projected to decline from about 3¼% this year to just under 1% next year and then increase to 2% in 2024. And inflation is expected to hover around 7% in the last quarter of this year, falling to around 3% by the end of next year and returning to the 2% target by the end of 2024.
Finally, we try to balance the risk of under- and over-tightening.
If we don’t do enough, Canadians will continue to suffer from high inflation. And they will expect persistently high inflation, which will require higher interest rates and, potentially, severe recessions to control inflation. Nobody wants that.
If we do too much, we can slow down the economy more than necessary. And we know that it has dangerous consequences for people’s ability to pay their debts, for their jobs and for their businesses.
This tightening phase will end. We’re getting closer, but we’re not there yet.
The Bank of Canada’s job is to keep inflation low, stable and predictable. We are still far from that goal. We see the risks around our forecast for inflation as reasonably balanced. But with inflation well above our target, we are very concerned about the upside risk.
We realize that adjusting to higher interest rates is difficult for many Canadians. Many households have large debt loads, and higher interest rates add to their burdens. We don’t want this transition to be any more difficult than it needs to be. But higher interest rates in the short term will lower inflation in the long term. Canadians are looking for ways to protect themselves from rising prices, and we’re working to protect them from entrenched inflation. It will take time to return to strong growth with low inflation. But we will get there. By getting through this difficult phase, we will return to price stability with sustainable economic growth, which benefits everyone.
With that summary, Senior Deputy Governor Rogers and I are now pleased to answer your questions.