'We are getting closer' to cutting interest rates, Bank of Canada governor tells MPs

The Bank of Canada is get‐ ting closer to cutting in‐ terest rates as inflation shows signs of coming down and staying down, the central bank's gover‐ nor, Tiff Macklem, told MPs Thursday.

"We do see renewed downward momentum in un‐ derlying inflation. The mes‐ sage to Canadians is, we are getting closer. We are seeing what we need to see and we just need to be confident that it will be sustained," Macklem said during an ap‐ pearance before the House of Commons finance com‐ mittee.

Economic growth has stalled, there's an excess sup‐ ply of goods, wage increases have stabilized and the labour market has cooled "from very overheated lev‐ els," which has helped to bring down prices, Macklem said.

"Our key indicators of in‐ flation have all moved in the right direction," he said, pointing to data on "core in‐ flation" that strips out more volatile price swings, like food and energy prices.

"We've come a long way in the fight against inflation, and recent progress is en‐ couraging."

The next opportunity for the central bank to cut rates comes on June 5.

Macklem's upbeat tone could be good news for homeowners and would-be buyers who have been forced to buy or refinance a home with interest rates at 20-year highs.

WATCH: Bank of Canada wants to see 'sustained' progress against inflation, Macklem says

He said the bank's current policy rate of five per cent has been "restraining" de‐ mand for homes.

But the Bank of Canada is now projecting "a strong pickup in housing over the course of this year" with "some increase in housing prices," Macklem said.

Acknowledging that high‐ er rates have been hard on Canadians and some sectors of the economy, like real es‐ tate, the governor said the bank doesn't "want to keep monetary policy this restric‐ tive for longer than we have to."

But Macklem also warned that the Bank's overnight rate likely won't return to what it was during the depths of COVID - when it was effec‐ tively zero - or even what it was before the pandemic, when it clocked in at 1.75 per cent throughout 2019.

Macklem said he's "con‐ cerned" that borrowers are expecting a return to the record-low rates that were the norm for much of the post-global recession period from 2009 to 2021.

"Interest rates are certain‐ ly not going to the emer‐ gency low levels we had dur‐ ing COVID. They're unlikely to even get back to the preCOVID levels," he said.

He also warned that, when the Bank does start re‐ ducing rates, "it's likely to be a pretty gradual path."

"Canadians should not be expecting a rapid decline in interest rates," he said.

Macklem's relatively rosy outlook on rates differs somewhat from the perspec‐ tive of Jerome Powell, the chair of the U.S. Federal Re‐ serve, the body that sets in‐ terest rates in that country.

The Fed held interest rates steady on Wednesday.

"Inflation is still too high," Powell said. "Further progress in bringing it down is not assured and the path forward is uncertain."

Worries about Canadian dollar

Macklem said there's a reason inflation has come down more here than in the U.S. - Canada's economy has been weaker than south of the border.

"We have our own cur‐ rency - we can run our own monetary policy," Macklem said, adding that a decision to cut rates while the U.S. stands pat could have an "impact on the Canadian dol‐ lar."

WATCH: Canada's infla‐ tion rate ticks up to 2.9% in March

"If we move lower than the Fed, that will tend to de‐ preciate the Canadian dol‐ lar," he said.

That could be problematic for vacationers and frequent cross-border travellers, but a weaker loonie could also boost the Canadian economy by making exports cheaper.

Government deficits 'not helpful,' Macklem says

Conservative MPs on the committee peppered Mack‐ lem with questions about the recent federal budget, which calls for about $50 billion in new spending over next five years.

Macklem has said in the past that big deficit spending is "not helpful" to the Bank's fight against inflation be‐ cause it pumps more money into the economy and drives demand for products and services.

While he was clearly reluc‐ tant to wade into partisan politics, Macklem said Ot‐ tawa's multi-billion dollar spending plan "won't be that big" and is not expected to throw off the inflation fight because the budget also in‐ cludes tax hikes that will take money out of the economy.

Finance Minister Chrystia Freeland's budget projects the federal government will collect some $19 billion in new tax revenue by hiking the capital gains inclusion rate from one-half to twothirds on all corporations and on individuals that declare a gain of more than $250,000 in a given year.

That tax hike is designed to help pay for some of the government's new health and housing measures.

"I don't expect it's going to have a significant macro im‐ pact relative to our previous fiscal forecast," Macklem said of the budget.

Conservative MP Adam Chambers challenged Mack‐ lem on that point, saying gov‐ ernment spending growth nationwide is still running well above the two per cent target Macklem has said it should stay at to help the Bank tame inflation.

Macklem conceded that higher deficit spending, dri‐ ven in part by rising deficits in recent provincial budgets, has challenged the Bank's in‐ flation fight.

The three largest provinces - Ontario, Quebec and British Columbia - expect their deficits to total about $29 billion in 2024-25 com‐ bined - up sharply from $17 billion in the last fiscal year.

"Last time I was here I think I said government spending on goods and ser‐ vices was forecast to grow at about two and a quarter. That has now moved up to two and three quarters. That is somewhat above two per cent so, yeah, that is not helpful in trying to get infla‐ tion down," he said.

He said the greater risk to the Bank's outlook is geopo‐ litical events like the ongoing wars in Ukraine and the Mid‐ dle East.

Chambers also said the prospect of a capital gains tax hike could prompt a rush of asset sales now, freeing up cash to be spent - a develop‐ ment that could juice de‐ mand and in turn boost prices.

"We're going to have to go through the budget a little more carefully," Macklem said in response.