Bank of Canada governor Tiff Macklem has developed a reputation for surprising financial markets. Few on Bay Street anticipated his outsized one-percentage-point rate hike in July 2022, for example. 

Macklem appears set to end 2023—among the roughest years for any Canadian central banker, ever—by introducing some certainty.  

The central bank left its benchmark interest rate unchanged at five per cent on Wednesday, as most everyone who pays attention to these things expected. There was little in the Bank of Canada’s policy statement that will change anyone’s forecast of where the economy and interest rates are headed. 

Maybe the most significant line from the central bank was that recent indicators suggest the economy “is no longer in excess demand.” 

Statistics Canada has been releasing its accounting of the third quarter over the past couple of weeks, and those data show that economic growth effectively stalled over the summer and into the fall. Gross domestic product declined at an annualized rate of 1.1 per cent in the third quarter, after growing at an annualized 1.4 per cent in the second quarter. 

That might sound ominous, but a stall is what the Bank of Canada has been attempting to orchestrate with the most aggressive campaign of interest-rate increases in its history. 

After inflation took off in the spring of 2021, policymakers eventually realized that price pressures were bigger than post-pandemic supply backlogs and surging commodity prices related to Russia’s war in Ukraine. Their calculations showed that household and business demand far exceeded the economy’s ability to keep up. The mission became dousing our desire to spend by making it unattractive to borrow. 

That mission might be accomplished. “Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year,” today’s statement says. 

Macklem’s inflation fight is far from over, of course. In fact, the trickiest phase has just begun. 

Inflation spikes tend to lead to recessions because it’s extremely difficult to pinpoint the interest rate that will balance supply and demand, and central banks prefer to err on the side of overdoing it. 

Macklem has said from the start that a “soft landing” is possible because an unusually large number of job vacancies could act as a cushion—employers might take down their “help wanted” signs rather than fire people, avoiding a big increase in the unemployment rate. So far, that story is holding. The jobless rate has been creeping higher, but was still at 5.8 per cent in November, a low number by historical standards. 

However, achieving a soft landing will require executing a difficult communications strategy. To keep inflation on a downward track, Macklem will have to convince economic actors that he won’t lose his nerve and cut interest rates at the first opportunity. Financial markets show traders already have decided cuts are coming as soon as the spring. That might be sooner than the Bank of Canada wants, based on its current forecast. 

The central bank noted in Wednesday’s statement that shelter costs are the last remaining source of significant inflation, and a premature interest-rate cut would only make that worse by lowering mortgage rates. 

Macklem and his deputies on the policy committee also observed that their preferred measures of “core” inflation—figures that adjust for volatile items in the consumer price basket—are around 3.5 per cent, and wages are rising at an annual rate of between four per cent and five per cent. Both indicators suggest inflation could be sticky, making the Bank of Canada’s goal of getting inflation back to the two per cent target more difficult.  

“Governing council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed,” the statement said. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.