Bank of Canada governor defends interest rate: 'It is working. Inflation is coming down'

Bank of Canada governor Tiff Macklem says he knows Canadians are struggling with creeping grocery bills, spiking mortgage rates and stagnant wages. 

Nevertheless, he's asking people to be patient just a little bit longer as high interest rates work to wrangle inflation down and improve the cost of living. 

The interest rate set by Canada's central bank influences how other institutions, like private banks, set their own lending rates. A higher rate means people may pay more for things like mortgages and lines of credit.

The idea behind hiking the interest rate is to discourage borrowing, decrease spending, and bring down inflation so that, overall, costs become more stable. 

The Bank has been steadily raising its interest rate in recent years. Since January, it's been sitting at 4.5 per cent, the highest it's been since 2007. Inflation, meanwhile, is hovering around four per cent — a dramatic drop from its peak of 8.1 per cent last summer.  

But during a speech at the Toronto Region Board of Trade on Thursday, Macklem said the Bank of Canada won't back off until inflation drops to around two per cent. And he says he won't rule out hiking the interest rate even higher, if necessary.

Here is part of Macklin's conversation As It Happens host Nil Köksal.

I wonder what you say to people in this country — as you know, who are struggling to make mortgage payments, they're struggling to feed their families — who hear about what you said today, and they don't really care whether inflation is at two per cent or three per cent? 

Inflation has been painful. It's been painful for well more than a year now. You know, you go to the grocery store, you fill up your car. The problem with inflation is there's nowhere to hide. It's everywhere.

And so, yes, we have raised interest rates rapidly. And it is working. Inflation is coming down…. It's going to be three [per cent] this summer, we think.

We understand that higher interest rates — well, that's needed to get inflation down. Eventually, inflation, when it gets back to target, those interest rates can come down, too.

Canadians have been patient, but I want to assure them it is working.

How tight, though, are you willing to squeeze them, you know, to hit that two per cent target? Because they're already feeling very squeezed.

It is important to stay the course and get inflation back to two per cent…. When inflation fluctuates, we want it to fluctuate around two per cent. We have a band of one to three. And our message is, you know, inflation should be within that band about three quarters of the time, so Canadians shouldn't have to worry about big increases in the cost of living.

What if it takes a recession to really hit the brakes on inflation? Are you willing to risk that? Recession is a very ugly and frankly, frightening word for a lot of people.

We're not forecasting a recession. We are forecasting slow growth, but it's small, positive growth.

What we're not expecting is what people conjure up when you say the word recession. When you say the word recession, people think big contraction, big increase in unemployment, I might lose my job — a lot of anxiety. That's not what we're forecasting.

So when RBC forecast that we might see that later this year, they're wrong?

Some forecasters have forecast a mild recession, which would be some little negatives. And as I said, that's not our baseline. Our baseline is small positives. But our forecasting is not accurate enough to rule out some small negatives.

You've said … that "wage growth needs to moderate." That might be a hard thing for a lot of people to wrap their heads around. Why shouldn't people in this country expect the kind of wage increases that they need — frankly, really need — to try to keep up with the cost of everything, the higher prices, the things that they need to live?

I can understand why people find this a bit counterintuitive. We all want our wages to go up. Who doesn't?

But let me say two things here. One is we actually want to see wages going up in the economy. But that needs to be backed by productivity growth. If you want real wage gains, if you really want to get ahead, you know, workers need to become more productive. They need to produce more with the same amount of work. So that's what sustains real wage gains over time.

The other thing I'll say is, look, when inflation's down at two per cent, you don't need wage growth to be so high to keep up. And what we've been saying all along is that inflation is coming down and people should plan on inflation coming down.

NDP Leader Jagmeet Singh, as I'm sure you've heard, has said that there's "absolutely no merit" to your approach of raising rates. Conservative Leader Pierre Pollievre has said he'd … replace you.

I know you've said in the past that the Bank isn't influenced by these kinds of statements. But what do you make of the fact that you are such a political target?

Canadians should be asking us tough questions. And so when Canadians should be asking us tough questions, of course, their elected representatives are going to ask us tough questions.

WATCH | Inflation and the cost of food:

As It Happens9:00Bank of Canada governor defends interest rate: 'It is working. Inflation is coming down'

Bank of Canada governors usually wield their power pretty quietly. And your office came to our team about the possibility of doing this interview. You wanted to speak to us and our audience. So what should people make of that decision? Are you worried that Canadians are losing faith in what you have to say?

I think what you should make from that is the Bank is listening. We know Canadians ... [have] expectations of their public institutions: that they are open, that they are transparent, that they don't just take decisions, but they explain why.

The more Canadians learn about us, the more they tend to understand what we're doing, and the better it works.

You're making decisions that affect people's lives so deeply — whether they can hang on to their homes, their businesses, whether their family has to turn to a food bank, which I'm sure you know, many, many more people, even with full-time jobs, are having to do. Do you feel the weight and the pressure of that?

I do feel the weight of that. You know, I get a lot of letters from Canadians and … as long as they're respectful, I respond to them.

What are people telling you? Can you tell me about one letter you responded to recently?

I would say there's a few kinds of letters. One is, you know, "I go to the grocery store ... I can't afford to put three decent meals on the table anymore. What do I do?"

And then the other kinds of letters I had, particularly from people who took out a variable rate mortgage, [are]: "My interest rate cost of my mortgage have skyrocketed. I don't know if I can afford to live in this house anymore. What do I do?"

We're in Ottawa. We're using our instruments for Canadians to control inflation. But the impact isn't equal across everybody. And, you know, that's something we can't do a lot about.

But it's important that we understand it. And I will assure you, we don't take our decisions lightly, and we don't want to put the economy and Canadians through more pain than we have to. And we are trying to find that balance.