Bank of Canada Governor Tiff Macklem said on Monday bringing down inflation is “proving more difficult than we thought.”

He also conceded that current government spending plans are at odds with the Bank’s objective of slowing inflation. His comments were made while testifying before the House of Commons finance committee.

Macklem was grilled for a comment he made last week on the fact provincial and federal government spending is estimated to grow by roughly 2.5% next year.

“If all those spending plans are realized, government spending will be adding to demand more than supply is growing and in an environment where we’re trying to moderate spending and get inflation down, that’s not helpful,” he said in a press conference following last week’s decision to leave interest rates unchanged.

Conservative MP Jasraj Singh Hallan pressed Macklem on whether monetary policy and government fiscal policy are currently at odds.

“It would be helpful if monetary and fiscal policy was rowing in the same direction,” Macklem said in one of his responses.

Hallan then asked: “[Are they] rowing in opposite directions, yes or no?”

“Yes,” Macklem answered.

However, later in his testimony Macklem spoke to the nuances in government spending and its implications on inflation. “The amount matters, but also what the spending is matters,” he said. “So, the more that the spending is adding to supply and not demand, that will actually help moderate inflation.”

Don’t need to wait for 2% inflation before cutting rates

Responding to a question posed by Conservative MP Marty Morantz as to when Canadians can expect the Bank to begin cutting rates, Deputy BoC Governor Carolyn Rogers responded by acknowledging it’s a “question on the minds of many, in particular Canadians who are carrying mortgages.”

Since monetary policy is forward-looking, Rogers said “we don’t need to wait until inflation is all the way back to 2%.”

“If we get signs that we can be confident that that inflation is coming down and will remain down, then we would start thinking about lowering interest rates, but we’re just not there yet,” she said.

The Bank of Canada’s latest forecast outlined in its October Monetary Policy Report has inflation reaching the 2% target rate by the second half of 2025.

However, Macklem also pointed to the challenges of bringing inflation back to its target due to rising global tensions, specifically the war in Israel and Gaza. This has “increased the risk that energy prices could move higher and supply chains could be disrupted again, pushing inflation up around the world,” he said.

He stressed that the situation remains dynamic, pointing to the recent change in the Bank’s forecasts released last week in which it raised its short-term inflation expectations and lowered its growth forecasts.

Macklem also commented on how the Bank underestimated just how big of an issue inflation would become—the bank repeatedly said in 2021 that inflation would be “transitory.”

“We were surprised at just how much and how fast inflation went up, and we’ve looked at those forecast years to try to understand them andavoid making those mistakes again,” he testified.

Canada has faced a housing supply issue “for a decade”

The topic of Canada’s housing supply crisis came up throughout the testimony, with Macklem saying it’s been a long-standing issue that is finally getting the attention it deserves.

“We’ve had a building supply issue in housing now for at least a decade…But we are pleased to see that governments at all levels are more focused on this issue,” he said. “I don’t think this is something that any one level of government can do this all by themselves…And ultimately the private sector is going to build most of these houses or apartment buildings, and they certainly need to be at the table as well.”

Macklem was asked about the impact higher interest rates are having on the real estate market, to which he said that elevated rates have “dampened demand.” He noted that this follows a period of low interest rates during the pandemic, which led to the market overheating and home prices rising “extremely rapidly.”

“As we’ve raised [interest rates], housing prices have actually come down,” he said. “However, higher interest rates mean the carrying cost of the mortgage is higher, so affordability has not improved.”

Political interference “not useful”

Macklem also reiterated the importance of the Bank of Canada maintaining its independence in the wake of several Canadian premiers calling on the central bank to end its rate-hike campaign.

“It is not useful when they give instructions to the Bank of Canada as to what we should do with interest rates,” he testified in French.

“And that’s because it can create an impression that monetary policy is not independent of governments,” he added. “The independence of the central bank is key to maintain price stability.”

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