Tiff Macklem - December 15, 2023

The Canadian Club is one of the most important podiums anywhere in the world that a Canadian can speak to, tell Canadians what it is that they think, develop those thoughts. And so I want to thank you for that very, very much.

The platform from which the eloquence of Canada has flowed all of that time. Whether it be business, education, politics, sports, arts, and culture, if someone wants to say something to Canadians about this country and about the future of this country, this is the venue you choose.

Well, thank you Glenn for that lovely introduction and good afternoon to everybody. It is a great pleasure to be back in Toronto for this my final speech of the year. I want to thank the Canadian Club Toronto for the invitation and I want to thank all of you for joining me today. I am looking forward to our discussion and I'm looking forward to hearing from as many of you as possible. As the year ends, I can't help but reflect on the year that was and think about the year ahead. We've come a long way toward restoring price stability. This was our second year of monetary policy tightening and that work is paying off. The economy is no longer overheated and that is relieving inflationary pressures. Inflation's come down from just over 8% in the middle of last year to 3.1% in October to be precise. That's significant progress. But to many Canadians, I know it doesn't feel great. We are in the tough phase of the monetary cycle. Inflation's come down, but it's still too high, and the increases in interest rates that are needed to relieve price pressures are squeezing many Canadians.

Looking ahead, I expect 2024 to be a year of transition. The effects of past interest rate increases will continue to work through the economy, restraining spending and limiting growth and employment. Unfortunately, this is what's needed to take the remaining steam out of inflation. But this period of weakness will pave the way to a more balanced economy. We expect growth and jobs to be picking up later next year and inflation will be getting close to the 2% target. And once Governing Council is assured that we are clearly on a path back to price stability, we will be considering whether and when we can lower our policy interest rate. I know it's tempting to rush ahead to that discussion, but it's still too early to consider cutting our policy rate. Until we see evidence that we are clearly on a path back to 2% inflation, I expect Governing Council will continue to debate whether monetary policy is restrictive enough and how long it needs to remain restrictive to restore price stability. In a world with increased macroeconomic volatility, we are also conscious that we may need to be nimble and we should be humble about our forecasts. Looking beyond next year, we also need to be thinking about what the post-pandemic normal will look like. In the past few years, the Canadian and global economies have experienced enormous volatility. And while the pandemic is behind us, wars, geopolitical tensions, climate risks, high debt levels, all pose new challenges. And against this background, it's critical that we learn from the high inflation that we've seen since the pandemic so that we can come out of this difficult period better prepared for what lies ahead. These are the themes I want to talk about today. First, I'll look ahead to what you can expect in the economy in the coming year. Then, I'm going to explain what you can expect from the Bank of Canada as we complete the journey back to price stability. We're never going to have a crystal ball, but the experience of recent years does have some important lessons. We've learned some things. We're adjusting, and I want to tell you how. So, let me start with the outlook.

We're working on a new forecast and we'll release our fully updated economic projections in late January, but we have a good idea of the broad strokes. Economic growth stalled through the middle of this year, and we expect it to remain weak into 2024. The excess demand that drove prices higher over the past two years is now gone as higher interest rates and tighter global financial conditions have helped the economy rebalance. With the cost of living still increasing too quickly and with growth subdued, the next two to three quarters will be difficult for many. Consumers will continue to hold back spending. Businesses will see weak demand and employment will probably grow more slowly than the labor force. That means the unemployment rate will likely increase further. That brings me to the inflation outlook. As growth slows, inflation pressures will ease, but we can't rule out some bumps along the way. We already have clear evidence that higher interest rates are bringing inflation down. Inflation for durable and semi-durable goods, things like furniture, appliances, clothing, and footwear, is now below 2%. Increases in the cost of services excluding shelter is just over 2%. That's pretty normal. What's not normal is that inflation in the prices of food, non-durable goods, and in shelter costs. Food price inflation has eased, but it's still about 5.5%. That's hurting everyone, especially lower income Canadians. Inflation in the prices of non-durable goods, excluding food and energy, things like cleaning supplies, personal care items, that's running about 4.5%. And inflation in the cost of shelter services has actually risen to almost 7%. Now, taken together, these three big categories of goods and services make up almost half of the CPI basket. So, it's no wonder that people are still feeling the pressure of higher prices. Unless the pace of price increases in these big categories slows, it's going to be hard to get overall inflation down to the 2% target. Now, the first two show some promise. Food price inflation should decline further as lower agricultural prices and transportation costs get passed through to the prices of groceries, and slowing demand should moderate non-durable goods price inflation. This leaves shelter price inflation. Why is shelter price inflation rising even as the economy slows? Well, part of the reason is that our policy rate is increasing mortgage interest costs. That's not unexpected or unusual. What is unusual is that the other components of shelter costs like rent, maintenance, they're also high. Rent was up 8.2% in October. This strength in shelter price inflation appears to be related to the structural lack of supply in housing. Canada's housing supply has not kept up with growth in our population and higher rates of immigration are widening the gap. Increases in interest rates are moderating the demand for housing and bringing the housing market into better balance. But the structural under-supply of housing means that inflationary pressure in shelter prices remains elevated. We do expect shelter price inflation to moderate over time, but I'll admit predicting the timing is difficult. So what's the bottom line? Over the coming months, you should expect to see some push and pull on inflation as the cooling economy reduces price pressures while other forces continue to exert upward pressure. That's why further declines in inflation will likely be gradual. When it's clear that inflation is on a sustained downward track, we can begin discussing lowering our policy interest rate. We don't need to wait until inflation is all the way back to the 2% target to consider easing policy, but it does need to be clearly headed to 2%. Now, of course, we can't rule out new surprises, and there are some obvious candidates. We could see an escalation of war in Europe or the Middle East or geopolitical tensions that divert trade and investment and disrupt supply chains. Climate events have become more frequent and more extreme both at home and abroad and their fallout often pushes prices up. All these risks mean we need to be vigilant and ready to adjust as needed. But looking at the year behind us is a good reminder of how far we've come. The 2% inflation target is now in sight. And while we're not there yet, the conditions increasingly appear to be in place to get us there. The economy is no longer in excess demand and underlying inflationary pressures are easing in much of the economy. We still need to see more downward momentum in core inflation and we will be watching the demand-supply balance, wage growth, corporate pricing behavior and inflation expectations closely as we assess where we are on the path to price stability.

We're also learning from the volatility over the past few years. If we take on board the lessons we've learned, we can come out of this difficult monetary cycle better equipped than when we went into it. In my year-end speech last December, I talked about some of the lessons from the high inflation that followed the pandemic. I highlighted three. It's a lot easier to restore demand than supply. Supply problems have a much bigger effect on inflation when the economy is overheated. And to better identify emerging inflationary pressures, we need to look beyond the aggregate economy and understand sectoral pressures. Today, I want to add two more lessons. The first one, we've actually had to relearn. Inflation is painful. It harms Canadians and it harms the economy. It makes people angry and it tears at the fabric of society. I talked about this three weeks ago in St. John, so I can be brief here. An overwhelming majority of Canadians say high inflation has made them feel worse off and almost nobody feels better off. It's a reminder of the bitter experience of the big inflation in the 1970s. In the past two years, a whole new generation of Canadians has experienced the pain of inflation for the first time, and we've relearned that inflation is our common enemy. Second, we've learned how valuable public trust is in the fight against inflation. We didn't have this trust in the 1970s, and it proved very difficult to get inflation back down. This time, trust combined with our forceful monetary policy response has kept longer-run inflation expectations anchored on the 2% target. And inflation is coming down with less short-term economic cost. To keep that trust we have and to restore the trust we've lost because inflation has been too high for the past couple years, we must improve transparency and communicate more clearly and more broadly. We're taking these lessons to heart. They're informing our work and our policy decisions. And this brings me to what you can expect from the Bank of Canada as we work to restore and maintain price stability. First, you can expect us to stay the course and get inflation back to the 2% target. Second, we're enhancing our tools and analysis to better assess and respond to inflation amid uncertainty and increased economic volatility. And third, we are continuing to listen more and communicate better, reaching more Canadians where they want to get their information. So, let me take each one of these in turn. We're committed to getting inflation back to 2%. And for good reason. At that level, inflation is low enough that people don't need to worry about changes in their cost of living from one year to the next. The economy works better when inflation is low and stable. There's more competition, there's less disagreement about wages and prices, and there's greater stability. Now, some have argued that it's too difficult to get back to 2%. So, why not settle for 3%? But you don't raise the target just because you missed it. We've been targeting 2% inflation since 1995 and it anchors our economic and financial system. If you change the anchor when the going gets tough, well, you don't really have an anchor and inflation gets less predictable and more volatile. Simply put, price stability centered on our 2% target is the best contribution the Bank of Canada can make to a healthy economy and the financial well-being of Canadians. We're also committed to enhancing our tools and analysis. We don't expect the next few years to be as volatile as the last few have been, but increasingly leading central bankers and economists see a future with more supply disruptions and more shifts in economic relationships and breaks in the connections we've taken for granted. This underlies the importance of learning from past experience. In particular, we need to pay more attention to the supply side and develop analytical tools that are better equipped to address breaks and shifts. This work is underway and already providing new insights. We've invested in new sources of data to get a more granular picture of supply and demand across sectors and households. This includes a new digital business leaders pulse survey which is focused on small and medium-sized businesses. Some of you have probably participated in it. It includes broader analysis of labor market indicators and the capacity to analyze very large data sets such as anonymized mortgages held by Canadians. We have also developed more detailed indicators of supply chain bottlenecks and we are continuing to evaluate new data sources. We're also adapting our economic models so they have the flexibility to accommodate economic shifts. During the pandemic shock and the recovery, the main drivers of growth and inflation shifted, but our models generally reflected our past economic relationships. We're working to develop the next generation of models for monetary policy that allow for more changes in behavior and provide greater flexibility to consider alternative risk scenarios. Finally, we're committed to constantly strengthening our decision-making process and improving our communications. We want diverse perspectives. We want to listen more, reach out more, and connect with more Canadians. Many of these changes are already well advanced. Earlier this year, we adjusted Governing Council by bringing in an external non-executive deputy governor for a term of two years. We did this because we want to bring more diverse perspectives into our policymaking. This year, we also began publishing a summary of our deliberations to provide more insight into Governing Council's monetary policy decisions. We have also been providing more plain language summaries and short video clips on social media to explain our decisions and the outlook for the economy. And Governing Council is visiting communities across our vast country to listen to Canadians and explain the work of the bank. You'll see more of this in 2024. Beginning in 2024, we'll also hold a news conference after every policy decision. We want households, businesses, and communities to understand the actions we are taking and why. Taking questions at every decision is my commitment to explain our actions. It's time for me to conclude.

We've come a long way in 2023, and by the time I give my year-end speech next year, I expect the economy will be growing, businesses' hiring plans will be expanding, and inflation will be getting close to our 2% target. Of course, predicting the future is difficult, and it could be harder to get inflation down than we think. We know we need to remain vigilant, but the progress we've made in restoring price stability is considerable and it's real. When I gave my year-end speech last year in Vancouver, the latest inflation reading was 6.9%. Today, it's less than half that and further reductions in inflation are in the pipeline. This progress has not been without cost. Many Canadians are feeling squeezed by higher interest rates. At the bank, we are doing our best to balance the risks of over and under-tightening. But if we learned anything from the bitter experience with the inflation of the 1970s, the biggest mistake would be to waver in our resolve to control inflation and lose the public's trust. The inflation surge that has hit Canada and the world in the last two years has taught us some important lessons. We are taking these on board and we will continue to learn and adapt, guided by our commitment to delivering price stability for Canadians. Thank you very much.

Well, the first thing I want to stress is that we have our own currency in this country. We have a flexible exchange rate and that means we can run our own monetary policy in Canada that is geared to the circumstances in Canada. And so the Fed's going to do what they need to do. We're going to focus on what needs to be done here in Canada. And the question everybody is asking is, you know, when are you going to lower interest rates? And everybody would like us to put it on a calendar. And if you can tell me when inflation's going to be, you can tell me what growth's going to be, you can tell me all those things, I could put it on a calendar. But, you know, we have a forecast, but there's uncertainty around forecasts. What I can be really clear about are the conditions under which we will begin discussing cutting interest rates. We have not started having that discussion because it's too early to have that discussion. We're still discussing whether we've raised interest rates enough and how long they need to stay where they are. When we are reassured that we're clearly on a path back to 2% inflation, yes, we will be having that discussion. And I look forward to that discussion, but we're not there yet.

Well, I do think they provide some more insight into our thinking. You know, as I mentioned, we will be moving to eight news conferences a year from four. And when I do a news conference after a rate decision, I do provide a little bit of insight into the discussion, but there's only so much time and the summary of deliberations does provide further insight into our thinking, our decisions. I don't think any one summary of deliberations is really that important. But the idea is over time, the market, Canadians, anybody who's interested, they understand more how we're thinking, right? And so they understand how we're likely to react when the situation changes. And one thing we know is that monetary policy works better when more people understand it. So that's what we're trying to do, right?

No. I agree with that. I think those are decisions to be taken by elected governments, not by the Bank of Canada. And just to be clear, we do not fund the government.

Well, on balance, I actually think we're in a much better position than we were in the 70s and the 80s, and I'll come back to that in a second. But I think what is more challenging today, and probably everybody in this room is experiencing it, the world is much more tightly coupled than it was in the 70s or even the 80s. And so things get transmitted, everything's happening faster. Things are more connected and so yes, things reverberate around much more quickly and more powerfully than they did in earlier periods. And so that does add a new level of complexity that whether you're a central banker or you're running a business, we're all dealing with it. Why I think though we're in a much better position than we were in the 70s. In the 1970s there was no monetary anchor. We had in the 50s and 60s been on a system of fixed exchange rates. The peg globally was abandoned in the early 70s and there was nothing really put in place to replace it. So there was no monetary aggregate. There was no monetary anchor. And governments and central banks didn't have the resolve to finish the job. And they were trying to lower inflation in the 70s, but they didn't have the resolve to stay the course and get inflation back down. And so unfortunately, Canadians and citizens actually around the world lived with a decade of very high and volatile inflation. And that was only ended by a very deep recession. And the difference today is, so there, you know, public expectations were not anchored. There was no real trust in central banks to do the job. That made the job very difficult. Today we're starting from a much better situation. We've had 25 years of successfully targeting inflation. Inflation, you know, through that 25 years was within our 1 to 3% band 80% of the time. Inflation actually averaged 1.9% over that 25-year period. That really matters. We have a proven record that we can and will bring inflation back to target. So this time around, when inflation went up rapidly, you didn't see long-run expectations of inflation move very much. They've stayed well anchored. Now of course that was combined with forceful action. You can't just, we couldn't just wait and let this problem solve itself. It wasn't going to solve itself. We did take forceful action and raised rates rapidly. But the combination of much more trust or credibility in central banks with a forceful response has kept inflation expectations much better anchored and so inflation actually has come down much more quickly than it did in the 70s and at much less economic cost.