Inflation rate will remain 'painfully high' all year, Bank of Canada governor anticipates

As Canadians continue to feel the squeeze from an increased cost of living, Bank of Canada Governor Tiff Macklem says Canada's inflation rate is set to remain "painfully high" for the rest of the year.

On Wednesday, Statistics Canada reported the country's annual inflation rate rose to 8.1 per cent in June, up from 7.7 per cent in May, marking the largest yearly change since January 1983.

In an exclusive interview with CTV News' Evan Solomon, Macklem said the inflation rate is "unfortunately… probably going to start with a seven for the rest of the year."

"It is going to be painfully high," Macklem said Wednesday.

Last month's inflation rate increase was mainly attributed to higher gasoline prices. In the interview, Macklem said gas prices have since come down and so he expects in a month from now, when the national statistics agency publishes its July inflation data, the rate "probably will come down a bit."

However, Macklem said demand is running ahead of the economy's ability to produce the goods people want, which will continue to create inflationary pressures.

In response to higher than expected inflation, on July 13 the Bank of Canada hiked its overnight interest rate by 100 basis points to 2.5 per cent. It was the biggest rate hike by the central bank since August 1998.

The next rate decision from the Bank of Canada is set for Sept. 7, following the scheduled Aug. 16 StatCan release of its July inflation report.

In the interview, Macklem said that while getting inflation back to the two per cent target is paramount, he's anticipating increasing the policy rate again "pretty quickly."

"We are deliberately front-loading our interest rate response. We want to get ahead of this," he said. "Inflation is going to come down."

Macklem said that while he doesn't think a recession is on the horizon, Canada's path to a "soft" economic landing is "narrowing."

"Looking back, if we knew last year everything that we knew today, yes, I think we probably would have begun raising interest rates earlier," Macklem said when asked whether he thinks the credibility of the Bank of Canada has been hurt given its handling of inflation.

Below is a full transcript of the interview with Evan Solomon, host of CTV News Channel’s Power Play and CTV's Question Period. The transcript has been edited for clarity.

Evan Solomon: Inflation hit a 39-year high – 8.1 per cent – is this the peak and if not, how high will you raise rates to combat it?

Tiff Macklem: "Evan look, there's no way around it: 8.1 per cent inflation is painfully high. We do expect—we know gasoline prices came down in July, so a month from now when StatCan publishes July inflation [data] it probably will come down a bit. But look, unfortunately inflation is probably going to start with a seven for the rest of the year. It is going to be painfully high.

"The simple reality is demand in the economy is running ahead of the economy's ability to produce the goods people want, and that's creating inflationary pressures. You asked where do interest rates have to go? Look, last week we took a big step, we raised our policy interest rate by 100 basis points. That got us into what we call the long run neutral range... We are deliberately front-loading our interest rate response. We want to get ahead of this. The best chance of getting that soft recovery is to front-load the policy response.

"That does argue for increasing the policy rate again, probably something around the top of that 2 to 3 per cent range, or a little bit over and doing that pretty quickly. Where interest rates ultimately have to go? Well that is going to depend on the evolution of the economy, and importantly the evolution of inflation. Getting inflation back to our 2 per cent target is paramount."

Evan Solomon: So you're talking about three [per cent], or more than three [per cent] in the next major rate hike by September, so people have to brace for that. Why not, if you know that's coming, why didn't you raise the rates more quickly now, to kind of put the brakes on inflation right now and stop the pain earlier?

Tiff Macklem: "Well, we did take a very big step last week. We raised our interest rate by 100 basis points. We haven't done that in a long time. And we have been raising very rapidly, we are front-loading this response. Exactly as you said, we want to get ahead of this.

"We need to moderate demand, give supply time to catch up, and take some steam out of inflation. And by front-loading, that gives us the best chance of the soft landing. Our objective is to get inflation back to control with a soft landing. We're going to take our decisions based on the best available information at each of the decision dates going forward.

"We are very focused on getting inflation back to 2 per cent."

Evan Solomon: I know you're saying you are getting ahead of it. Some worry that we're behind it. Governor, is Canada headed for a recession?

Tiff Macklem: "We're not projecting a recession. We are projecting that growth is going to slow materially, quite a bit. We're forecasting 3.5 per cent growth for this year, 1.75 per cent for next year. That's a pretty marked slowing. People are going to feel that, there will be some pain… What we're trying to do, is the economy is in excess demand, it is overheated. We need to get rid of the excess. We need to cool it so that it's not overheated. We don't want to over cool it, and there's some good reasons why we think that's possible.

"Right now, there are over a million vacancies, unfilled jobs in this country. There's a lot of scope to reduce those vacancies, moderate demand, reduce those vacancies without materially reducing employment or materially increasing unemployment.

"So we do think there's a path to a soft landing, but I will be very frank, that path is narrowing. With inflation at 8.1 per cent, with inflation broadening, with inflation persisting, that path is narrowing, and really that gets back to why we front-loaded our decision."

Evan Solomon: What's your message to Canadians who are scared and seeing no relief in sight?

Tiff Macklem: "My message to Canadians really is twofold Evan. First of all, inflation has come up very quickly, as recently as March of last year it was 2.2 per cent. It has come up very quickly. It is not going to stay this high. Inflation is going to come down. Canadians can be assured that inflation will come down. The other thing I want to say though is look, we understand it's a bit counterintuitive. We're raising interest rates, that's increasing the cost of borrowing at the same time that Canadians are paying more for gas, more for groceries, more for many everyday items.

"But it is by increasing the cost of borrowing that we will actually slow spending, slow demand, give the economy a chance to catch up and take some of the steam out of inflation. So I understand there is some short run pain here, but it's worth it to get price changes back to normal.

"Canadians need to get some predictability back. They shouldn't have to worry, you know, what the cost of living is going to be next month, next year. We are determined to get inflation back to our target."

Evan Solomon: You have been the target of a lot of criticism for the inflation crisis, did you make a mistake not raising rates earlier – a mistake that is costing the bank credibility?

Tiff Macklem: "The Canadian economy has been through a lot in the last couple of years. We've had the deepest recession, the fastest recovery. There is now a brutal war in Europe—Russia's attack on Ukraine. All our decisions through this period have been based on the best available information at the time we took the decision.

"Look, you know looking back, if we knew last year everything that we knew today, yes I think we probably would have begun raising interest rates earlier. But we didn't. I mean, last summer, unemployment was about 7.5 per cent. There was still a lot of slack in the economy. We were still dealing with waves of the virus, shutdowns.

"You'll remember in January, Omicron hit us hard, there was a new wave of shutdowns. But you know, we ended our QE last October–quantitative easing—we signalled in January that Canadians should expect higher interest rates, we began raising in March, we've raised 2.25 percentage points since then.

"We're doing that to get ahead of this. The excess demand we're seeing, the overheating of the economy, it is relatively recent. And by moving forcefully, we're doing two things: We're going to get, as I've said before, get demand more in line with supply. And the other part is keep those inflation expectations well anchored on the target.

"Our credibility is being tested, and that was an important reason why we took an unusually large step last week to send a clear message to Canadians that they can be assured that we're going to control inflation."

Evan Solomon: Is it fair to say to consumers today, 'Folks, it's bad but you have now reached peak inflation?' Is this peak inflation?

Tiff Macklem: "Look, as I said earlier Evan, we do expect it's going to come down when we get the July number a month from now. When you filled up your gas tank in June you were probably paying a little over $2 a litre, in July it's more like $1.80 something, so that alone will probably pull inflation down a bit in July. But inflation is going to remain painfully high for a number of months to come. Monetary policy does work, though. It's going to take some time to work through the economy, but it does work. And particularly as we get into next year, Canadians will see inflation coming down."

Evan Solomon: Governor Macklem, I really appreciate your time today. Thank you so much. Appreciate it.

Tiff Macklem: "It's a pleasure Evan, thank you."