The governor of the Bank of Canada said it was plausible that higher interest rates could slow the economy faster than in the past.
Macklem said there was a case to be made that the effect of rate increases could be stronger than the past.
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The impact higher interest rates have on servicing debt is bigger when households hold more debt.
It is possible that the Bank of Canada will raise the benchmark interest rate again in January, or that they will stop at 4.25 per cent, which is where they set the key rate last week with another outsized increase of half a percentage point.
The central bank dropped guidance that guaranteed future increases, so analysts will be looking for clues about Macklem's thinking. Decision making will depend on the assessment of the data at each meeting. If policymakers think households are more sensitive to higher borrowing costs, they can decide that the four percentage point increase they orchestrated this year will be enough to curb demand and cool inflation.
A question about former Bank of Canada governor Stephen Poloz's assessment in late November that Canada is more sensitive to interest rates than it was a decade ago prompted Macklem's comments.
Canada has not yet felt the full impact of the hikes.
Household debt to disposable income rose to a record high in the third quarter. In 2012 it was about 170 per cent, in 2002 it was 116 per cent, and in the third quarter of 1992 it was 94 per cent.
Canadian mortgage holders use less of their pay to buy discretionary goods as their borrowing costs go up.
The photo is from the National Post.
A higher debt level could affect the economy. Mortgage-holding Canadians use less of their pay to eat out at restaurants, purchase discretionary goods, and spend less money on the economy in order to service their debts.
Macklem hopes that higher interest rates will deflate excess demand without causing a spike in unemployment and give suppliers a chance to catch up with unfilled orders.
The governor said that structural changes in the economy could make it difficult to return to two percent.
Macklem warned in his speech that some of the disinflationary forces that helped central bankers achieve price stability over the past few decades won't be around in the future. The governor pointed to shorter, less efficient supply chains, as well as the retirement of the baby boom generation, as factors that could exert upward pressure on inflation in the years to come.
The monetary policy is working for us.
Macklem is a person.
Macklem thinks that we won't have the same disinflationary forces over the long term. It is possible that these developments will make it harder to bring inflation back to the target. It's difficult to say how hard it is.
The governor is confident that the Bank of Canada will keep inflation at 2%. Macklem acknowledged that forces beyond his control could put the target out of reach.
Stephen Tapp is an economist at the Canadian Chamber of Commerce. It is possible that slowing inflation down will be more difficult as there will be upward price pressures on wages from retiring baby boomers and scarce labour more generally.
Interest rates will be higher in the future than they have been in the past, according to Charles St-Arnaud. The reality we are entering is a new one. Since we have been using interest rates close to zero over the past decade, it will take a period of adaption.
The next year could pose a greater challenge in how these rate hikes contend with structural economic shifts as the central bank closes the book on monetary policy
Macklem characterized the past year as one with difficult decisions and hard lessons, but said that the future will be a lot better than the last three years, which were marked by a deadly global Pandemic, an epic collapse in gross domestic product, and a burst of inflation unseen in four
Macklem wants to restore price stability for Canadian workers and businesses. It will be worth it even though it is difficult. Our monetary policy is working and we can grow our economy with low inflation. If we follow through, that's what will happen.
The email address is shughes@postmedia.
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