Bank of Canada’s Macklem preparing for ‘shock-prone’ future

Article content

Bank of Canada governor Tiff Macklem says the central bank is preparing for a future that is more uncertain.

Article content

Article content

“Monetary policy cannot eliminate any of this uncertainty,” said Macklem, in an end-of-year speech delivered to the Greater Vancouver Board of Trade. “But by keeping inflation low and stable, monetary policy can avoid making it worse.”

Macklem highlighted structural changes happening in the world economy including trade protectionism, demographic shifts, digitalization, decarbonization and deglobalization.

Article content

“As we look ahead, the world looks more shock-prone,” he said. “We hope some of the major uncertainties hanging over the world will be resolved. We can’t count on that — but we can prepare.”

In his speech, the governor highlighted three priorities for the central bank next year. First, is international cooperation between the world’s central banks. With interest rates and sovereign debt remaining high and growth slowing, economic security is one of the top uncertainties.

“In 2025, Canada hosts the G7 meetings,” Macklem said. “That gives us a chance to build on these positive spillovers. International cooperation is getting harder, but as shared global risks accumulate, it is more important than ever.”

Second is investment in improved economic modelling that will better track supply disruptions and their impact on overall inflation.

“The new models will also distinguish between inflation that comes from higher demand and inflation that comes from higher input costs,” Macklem said. “This should all help us better understand inflation dynamics and develop monetary policy playbooks to better respond to shocks.”

Article content

Third is preparing for the central bank’s upcoming review. Every five years, the federal government and the central bank review its inflation-targeting framework to ensure it benefits Canadians economically and financially.

“Right now, we’re considering what issues to focus on in the upcoming review, reflecting on the big forces on the economy and what we’re hearing from Canadians,” Macklem said. “This points to several questions. In a more volatile world, how do we identify and measure underlying inflation? Is two per cent still the best target for the future? What’s the interaction between housing affordability and monetary policy?”

Macklem says he is not delivering a victory speech. Now that inflation has returned to the two per cent target, he wants to see it stabilize there.

“That’s price stability,” he said. “That’s giving Canadians the confidence that their cost of living will not change materially year to year.”

The bank’s policy rate currently sits at 3.25 per cent after five consecutive cuts since June. Looking ahead to next year, Macklem said when it comes to rate decisions the central bank will be taking a more “gradual approach to monetary policy” if the economy does what is expected.

• Email: jgowling@postmedia.com

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content