Tiff Macklem: Monetary policy - the right tool for the right job

Introduction

Good afternoon. It's a great pleasure to be home and speaking before the Montreal Council on Foreign Relations. At first glance, my topic-monetary policy-may not seem suitably global. But central banks have been leading the global battle against inflation since the pandemic. And our shared resolve to restore price stability is being rewarded.

Inflation has come down around the world. It has not been easy, and, in most countries, inflation is still too high. But inflation targets are now in sight, and the year ahead should bring further progress.

In Canada, inflation peaked just above 8% in 2022-the highest inflation in a generation. By the end of 2023, it had declined to about 3½%. That is welcome progress in response to a forceful tightening of monetary policy. The Bank raised its policy interest rate 10 times in 17 months. That slowed demand, rebalanced the economy and is bringing inflation down. Monetary policy is working.

That's what I want to talk about today. Monetary policy works to control inflation-not perfectly, not quickly, and not without pain. But it works. History, including recent history, has shown us that. But history has also taught us that monetary policy cannot do everything. There are many economic forces-some good, some harmful-that affect inflation. Central bankers need to understand these forces. But we cannot address most of them directly. So I also want to discuss the limitations of monetary policy. Finally, I'll say a few words on our monetary policy decision two weeks ago, and what we are looking for going forward.

What monetary policy does well

The last few years have caused some people to question monetary policy. That's not surprising. At the start of the pandemic, Canada experienced the deepest recession on record and inflation fell sharply. And when the economy reopened, we had the fastest recovery ever. Demand soared, supply couldn't keep up, and inflation rose very quickly. But even amid the huge swings in the economy, monetary policy has shown it has the power to control inflation over the medium term.

Early in my career at the Bank-long before I even imagined being Governor-Canada became the second country to announce an inflation target. It was 1991, and there was skepticism that the Bank could get inflation down to the target and keep it there. But we did.