Central banks won't let 1970s stagflation emerge, Macklem says

Hours after delivering the biggest interest-rate hike in 22 years in Canada, Tiff Macklem had a message for investors: There’s no reason to worry about inflation getting out of hand.

Hours after delivering the biggest interest-rate hike in 22 years in Canada, Tiff Macklem had a message for investors: There’s no reason to worry about inflation getting out of hand.

While there is plenty of uncertainty in the global economy, the Bank of Canada governor told Bloomberg News he’s quite certain that policymakers will be able to avoid a return of 1970s-style stagflation.

In the interview, Macklem said the world’s central bankers have learned the hard lessons from letting inflation get too high. They’re adjusting policy quickly to avoid a scenario where price pressures remains elevated and the global economy sinks into a recession, he said.

“A lot has changed since the 1970s,” said Macklem, who earlier Wednesday delivered a half-percentage point rate increase to wrestle inflation down from a three-decade high. “Central banks are going to be much more ahead of it than they were.”

In Canada, that means normalizing monetary policy “relatively quickly” to keep demand in check and prevent inflation expectations from hardening, he said. 

Macklem’s decision, which brought Canada’s policy rate to 1 per cent, came on the same day New Zealand’s central bank lifted its official cash rate by half a percentage point to 1.5 per cent earlier in the day. A hawkish pivot is also expected in the U.S., where Chairman Jerome Powell and other policy makers have put a half-point hike on the table for the Federal Reserve’s meeting in May.