Governor Tiff Macklem said so in his year-end speech in Vancouver on Monday.

“Yes, we are living in a difficult period of adjustment with the economy slowing down. We expect stagnation,” Macklem said a week after the bank raised interest rates by half a percentage point to 4.25%.

“As the snow melts and we get into spring, we should see much clearer evidence that inflation is coming down,” he said in a meeting with the press after his speech.

The bank has responded consistently to interest rates this year, including last week’s rate hike, which was larger than some observers had expected because the risk of not doing enough is greater than going too far, Mr Macklem said.

“If we don’t tighten the screw enough, inflation will remain too high. Canadians will continue to live with the difficulties that come with higher inflation,” he said.

geopolitical influence

Speaking to the Business Council of British Columbia, Mr. Macklem reminded that geopolitical trends could also make the fight against inflation even more difficult in the future.

Russia’s invasion of Ukraine has not only pushed up energy prices and inflation, but also underscored the vulnerability of international trade. He fears this could accelerate a push towards more protectionism, which could put further pressure on prices.

This latest trend marks a reversal of the positive impact that globalization and increased supply have had on inflation, Macklem pointed out.

“In the longer term, it seems likely that we won’t have the same disinflationary forces that we have had for the past 30 years,” he said. These potential changes could make it more difficult for inflation to return to and maintain the 2% target. »

High debts

In the short term, however, rate hikes could have a faster impact due to Canadians’ high levels of debt, with each rate hike adding to the pressure.

Statistics Canada reported Monday that households owed about $1.83 for every dollar of disposable income in the third quarter, nearing a record of nearly $1.85 set in the third quarter of 2018.

Mr Macklem acknowledged that this high level of debt could make rate hikes more difficult, but that the high household saving rate has also helped create more buffers to limit this effect for now.

Looking back on the year, he added that in addition to the war in Ukraine, the bank had been surprised at how the combination of significant supply chain disruptions and an overheated economy had affected inflation.

In response, the Bank of Canada has increased its data collection and interception capabilities on several fronts to keep a more detailed view of what’s happening in the world.

The bank is also doing more to engage with Canadians through social media and other channels, and reiterates that it recognizes that rate hikes put pressure on budgets.

“It’s really important that Canadians understand our decisions. We know that the more people understand how monetary policy works, the better the way monetary policy works,” Macklem said.

Since March, the Bank of Canada has raised interest rates seven times in a row in an attempt to lower inflation and slow the economy.

After peaking at 8.1% in July, annual inflation in Canada slowed to 6.9% in October, still well above the Bank’s 2% target for Canada.