Bank of Canada’s Efforts to Moderate Economic Activity and Price Increases

By Paul Vieira

OTTAWA – Bank of Canada Governor Tiff Macklem has stated that the implementation of higher interest rates is beginning to have an impact on economic activity and price increases. However, he also acknowledges that it may take some time before inflation slows down to the central bank’s target of 2%.

Macklem expressed concern in his prepared remarks delivered in Calgary on Thursday, stating that progress towards achieving 2% inflation has slowed down. He emphasized that there is still work to be done through monetary policy to restore price stability for Canadians.

The Bank of Canada’s decision on Wednesday to keep the key interest rate unchanged at 5.0% reflects the current weaker phase of the economy. However, the central bank continues to express worry about persistent underlying price pressures and is prepared to raise rates if conditions require it.

Macklem believes that the past interest rate increases are still having an effect on the economy, indicating that monetary policy could be sufficiently restrictive to restore price stability. However, he also acknowledges that inflation remains high at 3.3% as of July and shows little downward momentum in underlying inflation.

The Bank of Canada’s assessment reveals that underlying inflation, as measured by year-over-year and short-term gauges, is running at approximately 3.5%.

Following consecutive rate increases in June and July, the Bank of Canada decided to pause this week. Macklem states that data gathered since mid-July provide clearer evidence that higher interest rates are moderating spending and rebalancing demand and supply in the economy.

Macklem clarifies that the objective of higher interest rates is not to stifle economic growth. The central bank aims for 2% inflation to provide households with stability regarding changes in the cost of living on an annual basis.

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