In much the same way that Canadian households were forced to adjust on the fly to high and escalating prices, Canada’s job market and overall economy will see some painful changes in the coming months as Canada’s central bank steps up its fight to wrestle inflation into submission.

That was one of the main takeaways of a wide-ranging interview with Bank of Canada Governor Tiff Macklem on Thursday, one in which the central banker said he understands the pain that Canadians are feeling about their finances right now. But he is more resolved than ever that the bank’s actions to establish price stability will be worth it in the long run.

Facing price hikes the likes of which we haven’t seen in a generation for everything from food, to gasoline, to keeping a roof over their head, “people are frustrated, they feel they feel helpless,” Macklem said.

“We don’t want to make this more difficult than it has to be but at the same time … if we don’t do enough, if we’re half-hearted, Canadians are going to have to continue to endure the high inflation that is harming them every day.”

Inflation a global problem

After plunging in the early days of the pandemic, inflation rates in Canada and around the world have skyrocketed this year to their highest levels in decades, as snarled supply chains, the ongoing pandemic and imbalances between supply and demand for just about everything has led to prices increasing at double-digit paces.

Macklem and other central bankers are raising their lending rates — which makes borrowing more expensive — in an attempt to bring down demand enough so that supply can catch up. That goal is to bring back the price stability that Canadians crave, but it has not been — and will not be — a painless process.

“We’ve got to get things back to normal and so yes, we have been raising interest rates rapidly and I get that is a bit counterintuitive for Canadians,” he said.

“Their rent is going up, their groceries are more expensive, gasoline is more expensive, and now the borrowing costs are more expensive,” he said, which is exactly why adding short-term pain of higher lending rates is the only way out. 

“How does that work? … It makes it makes anything you buy on credit more expensive. So you you pull back and that helps get the economy balanced, and that’ll relieve those price pressures.”

An overexuberant housing market was previously a major driver of inflation, but the bank’s actions thus far have raised the carrying costs of mortgages significantly enough already that much of that excess demand is now gone.

The labour market is still tight, however, with high job vacancies and wages increasing at their fastest pace in decades. Last week, new numbers from Statistics Canada showed that the country added 108,000 jobs last month. That’s great news for anyone who got a job or wants one, but strong demand for labour makes Macklem’s job even harder because it adds to wage gains, and consumer spending, both of which the bank would like to see cool down.

“The labour market is is very tight,” Macklem said. “That’s a symptom of an economy that can’t keep up … can’t produce all the goods and services Canadians want to buy.”

Mild recession possible

It’s why he says Canadians should expect even more rate hikes to come on top of the six that have already happened this year. Even if it means the economy changes direction and starts losing jobs on a monthly basis, for a while.

“The unemployment rate is going to go up,” he said. “We’re not talking about high unemployment rates that we’ve seen in past recessions, but it is going to go up.”

That R-word — recession — is also top of mind for many Canadians right now, as there are fears the bank’s actions may inadvertently spark at least a slight one. While the bank’s short term forecast says a few quarters of slight growth is about as likely as a slight contraction, he does acknowledge a mild recession is on the table.

“We actually think growth is going to be close to zero for the next few quarters, until … about the middle of next year,” Macklem said.

If it happens, a mild recession may be the price the bank is willing to pay to bring down inflation. But on the other side of that slowdown, Macklem pledged, things will be better, and growth and prosperity will return.

“Monetary policy works,” he said. “It takes time to work and we do have to go through a difficult adjustment, but it works and we will come out of this.”

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