The Bank of Canada began its rate-hiking cycle just over two years ago to fight a growing inflation problem, which, while not over yet, is ending, but new concerns are emerging for Bank of Canada governor Tiff Macklem to deal with.

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“I think what we really tried to signal is that the balance of worries is shifting. For the last two years, we have been most worried about getting inflation down; we’ve made a lot of progress in getting inflation down, it’s not down to two per cent yet, but it’s come a long way back,” he said. “We do need to increasingly guard against the risk that inflation falls too far. We want inflation to come down, but we want it to come down sustainably to two per cent.”

I grew up in the '70s, so I know inflation, I felt inflation, I saw the anger it created

Bank of Canada governor Tiff Macklem

Just a month ago, Macklem said the Canadian economy was potentially entering a “soft landing” scenario, where inflation could be successfully brought back to its two per cent target without a substantial rise in unemployment. The unemployment rate then ticked up to 6.4 per cent in June and there is a growing chorus of concern that the economy is headed into recession territory.

“I’m going to let people put their own adjective on it,” he said about the economy achieving a soft landing. “But what do we see happening? We see growth is going to be picking up, we think inflation will keep easing to our two per cent target, so we’re not expecting a big slowdown in the economy, we’re expecting growth to pick up.”

Yet Wednesday’s decision to cut interest rates to 4.5 per cent and the monetary policy report that accompanied it focused more on the downside risks to the economy.

With an economy in excess supply, economists are now predicting two more back-to-back cuts by year-end. Criticism has also grown about whether the central bank waited too long to start cutting rates in the first place.

“Look, there’s people who are going to say we’re late, people who say we’re going too fast,” Macklem said. “We want commentary, we want good discussion, we want to see good analysis.”

The governor said the central bank remains firm in its stance that the economy has needed restrictive policy and still needs “somewhat restrictive policy,” but there’s the potential for more rate cuts if the inflation forecast remains on its path back to target, which policymakers expect to achieve next year.

But Canadian households can’t escape the general feeling that the country is currently in a recession, especially since per-capita gross domestic product growth has contracted for four consecutive quarters. Household debt in Canada is at record highs, the debt-to-income ratio has hit 180 per cent and a significant number of mortgages are up for renewal next year.

“I think Canadians should take from this that look we’ve been through a difficult period, we’re not all the way back, but we’re coming out of it,” Macklem said. “Interest rates are coming down, that means that Canadians are going to have more income left after they made their debt payments to spend on other things, things they want, things they need.”

The population boom has been getting a lot of attention from policymakers because of its unprecedented growth relative to previous years of slow, but steady increases. That growth has contributed to inflation, particularly when it comes to housing prices, but it has also contributed to consumption, thereby propping up economic growth.

The federal government has committed to capping the number of non-permanent residents to five per cent of the population this past March.

“Since the government announced their measures to reduce the net inflow of non-permanent residents, those are just starting to have an effect. It’s probably going to be the fall before they have much effect; meanwhile, population has continued to move up,” Macklem said. “We do devote quite a bit of attention in the monetary policy report to try to explain what we think will happen with population growth because that really underpins our forecast.”

Impact of potential U.S. trade disruptions

The United States election in November could have trade consequences for the global economy, especially if former president and Republican candidate Donald Trump wins a second term.

Trump was a big proponent of trade tariffs during his last administration, including a 25 per cent trade tariff on Canadian steel and aluminum in 2018. There have been no assurances that more trade retaliation tactics won’t happen again.

Macklem doesn’t comment on American politics or policy proposals by administrations, but he said trade disruptions could pose risks to Canada’s economic outlook.

“If there are changes in trade policy, that certainly can affect Canada,” he said. “If uncertainty is unusually high, businesses might tend to hold back on investment until the fog clears.”

Macklem said the usual relationships between interest rates and export demand might not perform the way they normally would in the absence of certainty for businesses. He added that the central bank has factored in those uncertainties before and will do so again as needed.

“Canada-U.S. bilateral trade is the biggest trade relationship in the world,” he said. “I think everybody knows that the U.S. is the biggest destination for Canadian exports; what not everybody knows is that Canada is the biggest single country destination for U.S. exports. This is a really valuable trading relationship for both countries.”

Lessons learned during the pandemic

Policymakers recently announced they will publish a report early next year to explain their actions taken during the pandemic, including their decision to roll out quantitative easing.

“The pandemic was completely unprecedented, and we did some things we never did before, so let’s learn from that experience,” Macklem said. “The idea of this report is to take all this work — much of it is already out there — and try to summarize it and draw out the lessons.”

Three experts will comment on the report and highlight any gaps the central bank may be missing in terms of lessons learned and research. But one dominant lesson remains clear for Macklem.

“I think the final lesson is that the recent experience was a reminder of just how much people hate inflation,” he said. “I grew up in the ’70s, so I know inflation, I felt inflation, I saw the anger it created. There is a whole new generation of Canadians, unfortunately, who had to experience inflation for the first time, and it’s been pretty painful.”

jgowling@postmedia.com

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