As the Bank of Canada monitors the economy’s response to higher interest rates, governor Tiff Macklem says it is still overheated and the labour market is too tight.
The governor’s comments come after Statistics Canada’s most recent labour force survey revealed the economy added 150,000 jobs last month as the unemployment rate hovers around record-lows.
While testifying before the House of Commons finance committee Thursday, Macklem told MPs the economy is in excess demand, which is putting upward pressure on prices.
That’s despite the Bank of Canada aiming to slow the economy and cool inflation by hiking its key interest rate to 4.5%, the highest it’s been since 2007.
“For inflation to get back to 2%, the effects of higher interest rates need to work through the economy and restrain spending enough for supply to catch up,” Macklem said in his opening remarks.
The labour market also needs to ease and wage growth must slow, the governor added.
Wages have been rising rapidly over the last year, but continue to lag inflation. In January, Statistics Canada reported wages were up 4.5% compared to a year ago.
After announcing the central bank will temporarily pause interest rate hikes last month, Macklem once again stressed Thursday that he is ready to raise rates further if inflation proves to be sticky.
“If inflation gets stuck and doesn’t come all the way back to the two per cent target, we are fully prepared to increase interest rates further,” Macklem said.
Headline inflation has fallen from its peak of 8.1% seen in June to 6.3% in December. Statistics Canada is scheduled to release January inflation data on Tuesday.
The Bank of Canada has forecast the annual inflation rate will fall to 3% by mid-2023 and to its 2% target in 2024.
The governor of the Bank of Canada along with the senior deputy governor regularly testify before House of Commons and Senate committees following the release of quarterly monetary policy reports.