'Our credibility is being tested:' Tiff Macklem says path to soft landing is narrowing

The Bank of Canada has been criticized for not moving on rates sooner as inflation hits multi-decade highs.

"Our credibility is being tested, and that was an important reason why we took an unusual step last week to send a clear message to Canadians that we are going to control inflation."

Inflation hit a fresh four-decade high of 8.1 per cent in June, and while the figure is lower than Bay Street expectations, the number is still adding more pressure on the central bank to continue to raise rates aggressively.

The central bank pointed to factors such as the Russian invasion of Ukraine and China's zero-COVID policy as reasons for the high inflation. The latter caused commodity prices to go up. The global recovery caused a mismatch between supply and demand.

Macklem told the Financial Post editor-in-chief last week that kicking off the rate hiking cycle earlier this year would have been better.

Macklem said after the July 13 rate decision that the recovery and excess demand account for 25% of the miss. If we knew everything we know today, we probably would have started raising interest rates earlier. We didn't know

There was enough slack in the economy last year that the Bank decided to stay the course and hold rates.

The first hike of the year was expected to take place as early as the January meeting, but the Bank of Canada decided not to raise rates. The central bank's decision to raise the rate was criticized and confused by analysts who were certain that all the boxes had been checked.

The Bank of Canada hiked rates last week in a bid to calm inflation. Despite slamming the brakes and expecting a slowdown in economic growth, Macklem suggested he still sees a chance of a soft landing.

Macklem said that the path to a soft landing is narrowing. With inflation at 8.1 per cent, the path is narrowing, and that's why we front- loaded our decision.

The email address is shughes@postmedia.

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