In a recent speech, Governor Tiff Macklem said, “Starting in March 2022, we’ve raised the policy interest rate quickly and forcefully—from 0.25% to 4.5%. And we’re already seeing some impact:

• Borrowing rates have gone up for households and businesses.
• Spending has declined, especially on housing and big-ticket items like furniture and appliances.
• The job market is tight, but small signs indicate that higher rates are starting to cool it down.
• Inflation is falling too—partly thanks to lower global energy prices and improved supply chains, but also thanks to lower demand here in Canada.
• Fewer businesses think high inflation will last. That matters because expectations about inflation affect decisions on prices and wages.

In January, we said we expect to pause rate hikes while we assess the impact of what we’ve done so far.

This pause is conditional: it depends on whether the economy develops as we think it will and whether inflation continues to fall.

With economic growth slowing to close to zero in the first half of 2023, inflation should drop to around 3% in the middle of the year and reach the 2% target in 2024. We’ve already seen inflation come down for the prices of many goods. But inflation in the services sector will take longer to cool.

We’ll be watching to see if the way businesses set their prices continues to reflect an economy that is overheated or if their price-setting returns to normal.”

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