Bank of Canada Governor Tiff Macklem says higher interest rates are working to bring down inflation, but with new geopolitical unrest in the Middle East and core inflation proving “sticky,” he did not rule out further rate hikes.

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“The fight against inflation is not over,” Macklem said from Marrakesh, Morocco, where he is convening with international counterparts at International Monetary Fund meetings. “We need to be prepared for ongoing volatility.”

Macklem said he believes Canada can return to the central bank’s target inflation of two per cent without triggering a major economic slowdown.

“We’re not expecting a recession in Canada,” Macklem said, adding that the Bank of Canada will release its outlook for the economy on Oct. 25 with the next interest rate decision.

“We’re not going to be forecasting a serious recession,” he said.

Macklem noted that, so far, the rapid increase in overnight interest rates over the past year and a half after a prolonged period of historically low rates has not triggered large increases in unemployment.

However, in May, the IMF flagged Canada among a short list of countries including Australia and Sweden where rising interest rates and high household debt combined to create the highest risk of mortgage default among the 38 countries in the Organisation for Economic Co-operation and Development.

Macklem said the small group of countries highlighted by the IMF, including Canada, saw surges in homebuying during the COVID-19 pandemic and those buyers are now facing higher interest rates, or soon will when their mortgages have to be renewed.

“That is certainly creating a burden for people, particularly if you bought right at the peak,” he said.

But the pandemic also resulted in more savings for some households, which should blunt the impact as mortgages are renewed at higher rates, he said, noting that the central bank’s research shows rising rates aren’t having the same impact across households in Canada.

“Some people have used those deposits to pay down their mortgage, and they are still being squeezed,” Macklem acknowledged.

“Other Canadians, their mortgage hasn’t rolled over and I think a lot of them are planning for the fact that their mortgage is going to roll over and so they’re keeping those deposits so when it does roll over, they’ll be able to maybe make a lump sum payment or certainly be able to afford those higher costs.”

Macklem said these higher savings rates are making it harder to tamp down inflation.

He said factors such as surging long-term bond yields — which make borrowing more expensive and could cool demand without central banks needing to increase the overnight rate — will be weighed when the central bank makes its next rate decision later this month.

“Obviously the longer rates are higher, the bigger impact that will be,” Macklem said.

He added that long-term bond trends have to be weighed against other factors such as the strength of economy and labour market.

“The other thing I would say is to the extent that higher long-term rates reflect expectations of future monetary policy, they’re not a substitute for doing what needs to be done to get inflation to come back to our target.”

The central bank left the overnight interest rate unchanged at five per cent at its last rate-setting announcement Sept. 6, but a further rate increase was considered during deliberations for that decision as core inflation remained stubbornly high.

Macklem said he and the IMF counterparts he is meeting with in Morocco were focused on the people affected by the escalating violence in Israel and Gaza and that it is too soon to say what impact the Middle East conflict will have on the global economy.

“Obviously, the immediate focus is on the human consequences of this. It’s hard not to be incredibly moved by the depths of this tragedy,” Macklem said. “The short answer in terms of the economy, it’s far too early to tell, and it really depends on to what extent this escalates.”

• Email: bshecter@postmedia.com

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