‘Excess demand’ fuelling inflation is now gone, Bank of Canada’s Macklem says

The head of the Bank of Canada says that 'excess demand' has been stripped out of the economy, which should continue to stifle inflation moving forward.

The head of the Bank of Canada says the “excess demand” that was fuelling inflation is gone from the economy.

Tiff Macklem’s comments on Wednesday at the Saint John Region Chamber of Commerce in New Brunswick come a day after Statistics Canada reported the annual pace of inflation slowed sharply to 3.1 per cent in October. That’s down from 3.8 per cent the month earlier and five percentage points lower than the peaks seen in June 2022.

The Bank of Canada raised its benchmark interest rate rapidly since March 2022 in an attempt to cool the economy and dampen demand for spending — efforts that Macklem said are expected to continue pushing inflation down in the months to come.

“We expect the economy to remain weak for the next few quarters, which means more downward pressure on inflation is in the pipeline,” he told the crowd. “In short, the excess demand in the economy that made it too easy to raise prices is now gone.”

Macklem acknowledged in his speech that despite slowing inflation, higher interest rates are “squeezing” Canadians. But he argued that “the payoff will be worth it” when the Bank of Canada achieves price stability and inflation returns to the two per cent target.

Macklem said interest rates “may now be restrictive enough” to tame inflation, but reiterated that the central bank is prepared to raise rates again if high inflation “persists.”

The central bank has held its policy rate steady in two consecutive decisions. The Bank of Canada’s final rate decision of the year comes on Dec. 6.

The Liberal government’s fall fiscal update on Tuesday predicted that  Canada will avoid a recession amid slowing growth.