‘Our credibility is being tested:’ Tiff Macklem says path to soft landing is narrowing

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Bank of Canada governor Tiff Macklem acknowledged the central bank’s credibility has been shaken as inflation hits multi-decade highs and the institution faces criticism for not moving on rates sooner.

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“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 they can be assured that we’re going to control inflation,” Macklem told CTV News’s Evan Solomon on Wednesday following the June inflation figures.

Inflation hit a fresh four-decade high of 8.1 per cent in June, and while the figure clocked in lower than Bay Street expectations, the number is nonetheless adding more pressure on the central bank to continue to raise rates aggressively when it next sets policy in September.

To explain inflation running rampant, the central bank had been pointing to factors such as the Russian invasion of Ukraine and China’s pursuit of a zero-COVID policy. The former caused commodity prices to surge, and the latter has contributed to global supply bottlenecks. Meanwhile, orders for goods took off with the global recovery, causing a mismatch between supply and demand.

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Last week, Macklem told Financial Post editor-in-chief Kevin Carmichael that in hindsight, kicking off the rate hiking cycle sooner this year would have been more prudent.

“The part that is more under our influence, is the recovery, and the excess demand and the faster-than-expected recovery, that accounts for about a quarter of the miss,” Macklem said shortly after the July 13 rate decision. “That’s where, if we had known everything a year ago that we know today, yes, we probably would have started raising interest rates a little bit earlier. But we didn’t know.”

Macklem added that last year there had still been enough slack to absorb in the economy that informed the Bank’s decision to stay the course and hold rates: unemployment stood at 7.5 per cent, there remained rolling virus waves and lockdowns, among other uncertainties heading into the new year.

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Bay Street economists widely expected the first hike of the year to take place as early as the January meeting, but the Bank of Canada ended up holding rates at 0.25 per cent. The central bank would take heat for the decision at the time, sparking criticism and confusion among the analysts who were certain that all the boxes for a rate increase had been checked.

In a game of catch-up, the Bank of Canada pulled the trigger on a surprise 100-basis point hike last week in a “front-loaded” effort to calm inflation. Despite slamming the brakes and expecting a slowdown in economic growth, Macklem suggested he still sees a chance of a soft landing on the horizon, though the path to getting there may be more obscured.

“So, we do think there’s a path to a soft landing, but I will be very frank, that path is narrowing,” Macklem said on CTV. “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.”

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