‘Shock-prone world’ highlights need for productivity: Bank of Canada governor

Bank of Canada governor Tiff Macklem says the world has become more prone to supply shocks which create more risks to inflation, but the central bank is in a better place to deal with them now that inflation is under control.

However, he said the capacity for monetary policy to stabilize output in the face of supply shocks is “somewhat limited.”

“That speaks to the role of fiscal policy, and for fiscal policy to play that role around the world, countries need to rebuild their fiscal buffers so they can play that role post-pandemic,” he said.

Macklem spoke to reporters from Washington, where he was attending International Monetary Fund meetings.

He spoke about the need to increase productivity, or how much work gets done in a given time frame.

He said productivity has been a longstanding problem in Canada, which is a risk to GDP and can add to inflationary pressures.

At the meetings, Macklem said officials discussed “how increasing productivity growth will be essential to supporting non-inflationary growth and economic resilience.”

“We’re all certainly very aware that we could face new shocks,” he said. “It is a more turbulent world, and we need the analysis and the tools to manage that uncertainty.”

The Bank of Canada cut its key interest rate earlier this week by half a percentage point, its fourth cut this year as inflation has fallen past the central bank’s two-per-cent target.

The move brought the central bank’s policy rate down to 3.75 per cent, as it signalled plans to continue cutting in the coming months.

“We are back to low inflation,” said Macklem, saying that one of the factors in the central bank’s decision was the need to maintain inflation around two per cent.

“The decline in interest rates should contribute to a pickup in demand, gradually absorbing the excess supply in the economy,” he said.

Macklem also said the Bank of Canada is digesting the federal government’s announcement Thursday that it is slashing immigration targets for the next few years.

He said the central bank will be monitoring the evolution of population growth relative to its assumptions.

“There’s a fair amount of uncertainty about exactly how quickly these things kick in,” he said.

Population growth affects both demand and supply, said Macklem.

“What is more sensitive to your assumptions about population growth is your GDP forecast,” he said.

“We’re digesting this … we’re going to look closely at just the actual path we see in population growth, and we’ll be revising as we gain more confidence in exactly what’s going to happen.”

This report by The Canadian Press was first published Oct. 25, 2024.