BoC Governor Tiff Macklem said in a speech that “recent developments have reinforced our confidence that inflation is coming down.” The bank expects CPI to fall to around 3% in the middle of 2023, and the reach 2% target in 2024. But, “if those things don’t happen, inflation won’t come back to our 2% target, and additional monetary tightening will be required.”
Macklem noted that the tightening pause as announced in January was “conditional”. He said, “it is conditional on economic developments evolving broadly in line with the outlook published in January.”
“The transmission mechanism takes time—typically we don’t see the full effects of changes in our overnight rate for 18 to 24 months. That’s why policy needs to be forward looking,” he explained. “In other words, we shouldn’t keep raising rates until inflation is back to 2%. Instead, we need to pause rate hikes before we slow the economy and inflation too much. And that is what we are doing now.”
“If new evidence begins to accumulate that inflation is not declining in line with our forecast, we are prepared to raise our policy rate further,” he said. “But if new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further.”
