‘We need to bring it down’: Bank of Canada’s Tiff Macklem speaks candidly to the Star on how he’ll tame inflation

Inflation is the talk of the nation. Bank of Canada Gov. Tiff Macklem told parliament’s finance committee on Monday he expects the Bank of Canada will consider another 50 basis-point hike (half a percentage point) when it makes its next policy decision in June.

That comes after the latest inflation data released last week showed the consumer price index rose more than expected to 6.7 per cent, its highest level in three decades.

That report came in the wake of the central bank hiking its benchmark rate 50 basis points on April 13 — the first time in more than 20 years it’s been raised that much in one move.

Prices are up for many reasons: government spending because of the pandemic, contorted supply chains, and higher commodity prices due to Russia’s invasion of Ukraine — not to mention low interest rates which have helped fuel an ultra-hot housing market.

Like other central banks, the Bank of Canada is trying to lasso inflation, to restore price stability amidst one of the most complex economic environments in memory. And it’s promised to do so “forcefully” if necessary.

We recorded our conversation with Macklem on April 18, two days before the latest inflation numbers were released.

Welcome Governor. Many thanks for making time for us today.

Pleasure to be here, Howard.

First off, I want to find out a bit about you. What attracted you to economics?

Well, it seems a bit ironic now, but I grew up in the 1970s when the big problem was inflation. Inflation combined with high unemployment — a problem we don’t have now. As a teenager watching the news, reading the newspapers, everybody seemed to be really angry and inflation just seemed to rip people off. There were a lot of strikes and it seemed at the time like inflation just sort of landed from outer space. I went to university curious about this and well, one thing led to another and I kind of got drawn into economics. And next thing you know, I was in grad school and then I was lucky enough to land my first job at the Bank of Canada. I’ve been at a couple other places since, but I keep coming back to the Bank of Canada.

Esta bien. Well, let’s get to the Bank of Canada. For some people, it’s probably a mysterious place. I mean, you sign the money, you set interest rates. But what should people really know about what you do at the Bank of Canada?

Central banks have two core purposes. The first one is not a very user friendly name. We call it ‘lender of last resort’ or ‘market maker of last resort.’ What’s that about? It’s that credit is the lifeblood of a modern, market-based economy. And every once in a while, markets freeze. They panic and credit is frozen. And when that happens, it’s really dangerous. It means you can’t get a mortgage. Your company can’t get operating capital to buy inventories. You can’t get a car loan. You can’t get a student loan. And if we let that persist, everything’s going to stop. And that’s at the core of why you have a central bank to provide liquidity in these panicked situations.

We’ve actually had two of these in the last 15 years, the global financial crisis in the wake of Lehman (Brothers’ collapse). Markets panicked. They frozen. And central banks — the Bank of Canada — central banks around the world came in at scale to provide liquidity and restarted markets. And then at the start of the pandemic, the same thing happened. There was a huge dash for cash. The Bank of Canada and other central banks had to come in at scale and provide liquidity. Fortunately, actually, market functioning was restored pretty quickly and we terminated all those facilities. The other thing that we do and this we do every day, and you mentioned it in your opening, we maintain the value of money, price stability.

That’s the connection to inflation?

Exactly. And right now, as you underline, inflation is too high. We need to bring it down. We need to bring it back down to our two per cent target.

I quoted ‘forcefully’ in the introduction. You’ll attack inflation ‘forcefully’ if needed. Can you define ‘forcefully?’

I’ll be upfront. We’ve been surprised by the strength of this recovery. I mean, we’ve been through a lot in the last couple of years. We’ve had the deepest, sharpest recession in history and we’ve had the fastest and quickest recovery that we’ve ever had. And now, you know, we need to normalize monetary policy relatively quickly. So when we say forcefully that means we’re going to make sure we stay ahead of this and we provide the monetary policy that’s needed to get inflation to start coming down and get back to our two per cent target.

And what’s the risk that you hike too quickly and cause an economic contraction?

That’s certainly something we’re very cognizant of, and look there’s risks on both sides. If we move too slowly, inflation doesn’t come down. It starts to become embedded in people’s expectations. People start to think — and this is what happened in the 1970s — people start to think inflation is here to stay, and if that happens, it becomes much more costly to get it back down to the two per cent target. In fact, you probably would have to have a real slowdown, maybe even a recession to do that. That’s the lesson from history. So by normalizing reasonably quickly, right now, the economy is strong. It can handle higher interest rates. It actually needs higher interest rates to moderate spending to bring demand and supply in the economy into better balance. And so inflation comes back down. So, if you look at our own forecast, we’ve got good growth with inflation coming down.

So how can we know that we won’t have the stagflation that you read about as a kid in the 70s?

Well, look, we can’t rule anything out for sure, Howard, but we’ve had these very low interest rates now for more than a dozen years. I think it’s unlikely that this changes dramatically over overnight and when you look at some of the big forces in the economy, they have contributed to these lower interest rates. And it’s not just in Canada, it’s global. It is possible that we could be going back to a world where there are more sustained inflationary pressures. We don’t know for sure, but I think if it changes, it’ll change pretty gradually and we’ll be able to adjust.

This interview has been edited for length and clarity.

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