Governor Tiff Macklem explains that higher interest rates are working to slow inflation but warns that getting all the way back to the 2% target may take time. He also discusses the recent stress in the global banking sector and how financial stability and price stability work together.

Inflation fell from its peak of 8.1% last year to 4.3% in March. We expect it will decline to around 3% this summer. This is good news and shows that interest rate increases are working to rebalance the economy. But the work of monetary policy is not done.

Low, stable and predictable inflation is key to Canada’s economic well-being, which is why inflation must be centred on the 2% target.

Getting all the way there will take time and involves risks, notably that services price inflation could stay higher for longer than we expect. For services price growth to slow enough for inflation to get back to target, three things need to happen:

• The labour market needs to rebalance, and wage growth needs to moderate.
• Businesses need to slow the pace and size of their price increases.
• Inflation expectations need to come down—too many people still believe inflation will be higher than our forecasts over the next two years.

We’re on track, but there is a risk it might take more time than expected for these three things to occur. If that happens, inflation could get stuck above our 2% target.

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