Bank of Canada Governor Tiff Macklem said he remains firmly on an interest rate hiking path because of worries about elevated domestic price pressures and inflation expectations becoming entrenched.
Macklem, in a speech Thursday, painted a picture of an economy that is still “clearly” in excess demand, with businesses facing an extremely tight labor market, wage gains broadening and underlying inflation pressures showing no signs of letting up.
Macklem said that while a recent slowdown in the headline annual reading is “welcome news”, inflation will “not fade away by itself.” Macklem said there’s some evidence global inflationary forces have begun to ease, helping to bring the annual headline rate down to 7 per cent in August. But he downplayed the impact the recent slowdown will have on central bank policy.
Domestic inflationary pressures, meanwhile, are becoming more important, and there’s worry expectations could harden at current levels. Wage growth has risen and continues to broaden, Macklem said, and businesses are passing higher input costs onto consumers.That could create what he called self-fulfilling inflation. “The longer high inflation persists and the more pervasive it becomes, the greater the risk that high inflation becomes entrenched,” Macklem said.
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