Interest rates need to keep rising to fight inflation, Tiff Macklem tells MPs

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Bank of Canada Governor Tiff McCallum waits to appear before the House of Commons Finance Committee in Ottawa on November 23.Adrian Wilde/The Canadian Press

MPs questioned Bank of Canada Governor Tiff McCallum on Wednesday about inflation and historic fiscal deficits at the central bank, as top opposition politicians tried to frame the bank’s continuing dilemmas for their own political gain.


Mr McCallum used his appearance before the finance committee in Ottawa to reiterate the central bank’s core message: inflation remains very high and interest rates need to keep rising.

The Bank of Canada has raised interest rates six times this year, and is widely expected to announce another interest rate hike on December 7.

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The most pointed questions for Mr McCallum came from New Democrat leader Jagmeet Singh and former Conservative Party leader Andrew Scheer. No politician is a regular member of the Finance Committee, and their presence highlights how central monetary policy has become a subject of political debate.

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Mr Singh pressed Mr McCallum on the inflationary impact of corporate profits. Unions and left-leaning politicians have argued in recent months that the central bank is putting too much emphasis on wages that are causing inflation, and not enough on corporate greed.

Mr McCallum acknowledged that companies have been passing the rising costs on to customers relatively easily, allowing them to protect their profit margins. But he said he expected businesses to pass on the savings to customers because of the fall in input costs.

“Overall, if you look at profits as a share of GDP, they are up,” Mr. McCallum said. “A big part of it is that oil prices, energy prices have gone up a lot. Input prices in the energy sector haven’t gone up as much as selling prices, and so their profits have gone up.”

The Conservatives, under Mr. Scheer, approached the Bank of Canada for the first time in its 87-year history to lose money. The central bank’s balance sheet expanded massively during the pandemic, as a result of its government bond-buying program, also known as quantitative easing, or QE. Now the sharp rise in interest rates has created a mismatch on its balance sheet.

The bank is paying a higher interest rate on about $200 billion of commercial bank deposits held at the central bank than it earned on government bonds it bought during the pandemic, resulting in a net interest loss. It estimates that it will lose between $5-billion and $6-billion over the next year or two, before returning to profitability in 2024 or 2025.

Because the bank is not allowed to retain its earnings and does not have reserves, the finance department needs to decide whether to cover the bank’s losses directly or adopt some other method to cover the losses. can do. Once it returns to profitability.

Conservatives have long been critical of the bank’s QE programme, and Mr Scheer said it appeared the central bank needed a “bailout”. Mr McCallum said it was largely an “accounting issue” and pointed to a number of solutions being developed by other central banks.

“Whichever solution is chosen, it will not affect the way monetary policy is conducted,” he added.

Mr McCallum largely stuck to the script through the appearance, arguing that more needed to be done to get inflation under control. The economy is in tatters, demand for goods and services is exceeding supply, and companies can’t find enough workers, he said.

The rate of inflation has come down in recent months. Annual consumer price index inflation was 6.9 percent in October, down from a high of 8.1 percent in June. But inflation is still more than three times the central bank’s 2 percent inflation target.

After six rate hikes this year, the key question is how far the bank wants to go. Financial markets are betting on another quarter-point move in the December meeting, followed by another quarter-point move in January. That would take the bank’s benchmark interest rate to 4.25 per cent early next year, at which point markets expect the central bank to pause.

“We’re trying to balance the risks of tightening less and tightening more,” Mr McCallum said. “This tightening phase will come closer. We’re getting closer, but we’re not there yet.”


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