After raising interest rates eight consecutive times, Bank of Canada governor Tiff Macklem told an audience in Quebec City on Tuesday that inflation is showing signs of "turning the corner" and that the coming year "will be different."
Macklem said the bank "responded forcefully" in the face of an "overheated economy," with the latest trends suggesting that the bank's "monetary policy is working."
"After 11 months of policy rate increases, we're seeing signs that higher interest rates are beginning to rebalance the economy," Macklem said in his remarks.
The overnight rate stands at 4.5 per cent as of January, up from one-quarter of a percentage point more than a year ago.
The bank says it will now keep the interest rate at its current level to see if it has done enough.
"We are certainly prepared to raise interest rates further," Macklem told reporters following his speech. "We are determined to get back to our two per cent target, but we don't want to make this ... more difficult than it has to be."
The annual inflation rate stood at 6.3 per cent in December, well above the bank's target of two per cent although down from last year's high of 8.1 per cent in June. The price of fuel and food have been particularly high over the past year.
Ultimately, Macklem said it would take time – up to two years – for Canadians to see the full impact of interest rate increases.
But the central bank expects the annual interest rate to fall to around three per cent by the middle of this year and reach two per cent in 2024.
Macklem's speech comes as the Bank of Canada prepares to release its first summary of deliberations on Wednesday explaining the reasons behind its decision to raise interest rates.
Higher interest rates make it more costly to borrow, say for a home, reducing demand and effectively slowing down the economy.
Macklem acknowledged that the bank really has one main tool to try to control inflation, which is to raise interest rates.
He also pointed to the reopening of the economy in the wake of the COVID-19 pandemic, where demand outpaced supply, as well as Russia's invasion of Ukraine in February 2022, as adding to the sharp rise in inflation.
His speech came as a new BMO survey shows Canadians believe they need $1.7 million in savings in order to retire, up $300,000 from two years ago.
"We are determined to get inflation back to our target, that's what Canadians expect from us and that's what we're determined to do," Macklem told reporters.
He said economic growth is expected to remain near zero for the next two to three quarters as supply catches up with demand.
What could take longer to drop is inflation in the price of services, which Macklem said is more directly linked to the tight labour market and increased labour costs.
The bank will also watch how businesses set their prices, Macklem said, which rose "more frequently and by more than usual."
With files from CTV National News Producer Jordan Gowling and The Canadian Press