Slowing growth a ‘good thing’ when economy is overheated: Macklem

Bank of Canada governor Tiff Macklem says that although a slowing economy may not seem like a good thing, it is when the economy is overheated.

Speaking in Quebec City Tuesday, Macklem said that higher interest rates are working to cool the economy as elevated borrowing costs are constraining spending on big-ticket items such as vehicles, furniture and appliances.

As demand for goods and services falls, Macklem says the economy will continue to slow.

“That doesn’t sound like a good thing, but when the economy is overheated, it is,” he said.

In addition to global events, the overheated domestic economy pushed up prices rapidly, he said.

To slow the economy domestically, the Bank of Canada has embarked on one of the fastest monetary policy tightening cycles in its history. It has hiked its key interest rate eight consecutive times since March, bringing it from near-zero to 4.5%.

However, last month, the Bank of Canada said it will take a “conditional” pause to assess the effects of higher interest rates on the economy.

“Typically, we don’t see the full effects of changes in our overnight rate for 18 to 24 months,” Macklem said Tuesday.

“In other words, we shouldn’t keep raising rates until inflation is back to 2%.”

However, the governor said the Bank of Canada will be ready to raise rates further if inflation proves to be more stubborn than expected.

As gas prices have fallen and supply chains have improved, inflation in Canada has slowed since peaking at 8.1% in the summer. Macklem called this a “welcome development,” but stressed inflation is still too high.

For inflation to get back to 2%, Macklem said wage growth will have to slow, along with other prices.

Wages have been growing rapidly for months but continue to lag the rate of inflation. In December, wages were up 5.1%.

Though annual inflation is still at decades-high levels, economists have been encouraged by a more noticeable slowdown in price growth over recent months.

The Bank of Canada forecasts the annual inflation rate will fall to 3% by mid-year and to 2% in 2024.

Nojoud Al Mallees, The Canadian Press

Nojoud Al Mallees is a reporter with The Canadian Press, a national news agency headquartered in Toronto and founded in 1917.