Cutting interest rates was easy. But the Bank of Canada still has a credibility problem

Bank of Canada governor Tiff Macklem says the central bank has to rebuild trust with Canadian households. After the last two years of interest rate hikes and messaging missteps, that's not going to be an easy job.

The central bank cut rates this week for the first time since March 2022, when it embarked on one of the fastest and most aggressive hiking cycles in Canadian history, raising its key overnight lending rate 10 times in an attempt to get inflation back under control. 

That meant Canadian households were hit by a double whammy of sorts. They were clobbered by rising prices and squeezed by increased borrowing costs.

That was exacerbated by the fact that none other than the central bank governor himself initially told Canadians that interest rates would remain low.

"If you've got a mortgage or if you're considering making a major purchase, or you're a business and you're considering making an investment, you can be confident rates will be low for a long time," Macklem said in July 2020.

Within a matter of months, inflation began to surge, which put immediate pressure on the Bank of Canada to start raising rates.

In a National Post editorial in 2021, Macklem wrote that the inflationary pressures Canadians were struggling with were due to temporary factors mostly caused by the pandemic.

"All these factors have driven prices up, but none of them are likely to last. So, we shouldn't overreact to these temporary price increases," he wrote.

Even as inflation slowly started working its way back to target, the bank was reluctant to move too fast and bring down interest rates too early.

Macklem says he worries about central bank's credibility

In an interview with CBC News, Macklem was asked if he worries about the central bank's credibility and public trust.

"I do," he said, noting the last few years have been "a very difficult period for Canadians." 

He says inflation makes people angry and erodes their confidence in the economy.

"That's one of the reasons why it's so important to get inflation back down," said Macklem. "We've taken a bit of a hit, and we're going to have to rebuild that trust."

WATCH | CBC's Peter Armstrong interviews BOC governor Tiff Macklem: 

'We're gonna have to rebuild that trust': Bank of Canada governor

6 months ago

Duration 9:25

As interest rates fall for the first time in four years, Tiff Macklem, Bank of Canada governor, sits down with Peter Armstrong, CBC senior business correspondent, to discuss the Canadian economy and accountability.

Jim Thorne, the chief market strategist from Altus Wellington Private Wealth, says that won't be easy.

Thorne says the bank had a tough job and had its hands tied by various levels of government that kept spending even as the central bank was trying to rein in inflation.

But he says the Bank of Canada should have stopped raising rates earlier and started cutting months ago. He says young Canadians trying to buy their first homes were particularly hard hit.

"[The Bank of Canada] just hammered their reputation with the younger generation," said Thorne. "They just basically hammered the millennials and all the young families with a variable rate mortgage. So it's going to take a long time to put the genie back in the bottle."

Keeping partisan politics at arms-length

It wasn't just young people venting their frustrations. Opposition leader Pierre Poilievre has levelled sharp criticism at both the Bank of Canada and the bank's governor.

He denounced the bank as being financially illiterate and has said he would extend the auditor general's authority to include the Bank of Canada and push for a review of its pandemic policies.

Poilievre has even threatened to fire Macklem if he becomes Prime Minister. A promise that prompted criticism from those who say the institution should operate at arms-length from partisan politics.

The central bank has avoided wading into political debates. Previously Macklem had said he would leave politics to the politicians.

But senior deputy governor Carolyn Rogers recently highlighted how important it is to make sure Canadians understand and trust the institution is working to make their lives better.

"What is really important to us is that Canadians understand what we're doing, why we're doing it and that they understand that we're thinking about them and that we have their best interests at heart when we make a decision," Rogers said at a parliamentary committee meeting this spring.

Seeing people beyond the numbers

Getting that message across is never easy.

Frances Donald, global chief economist at Manulife Investment Management, says rate hikes have been extremely painful for many Canadians even while the economy as a whole has been described as resilient.

She says squaring that can be a tough communication needle to thread.

WATCH | What the BOC's interest rate cut means for you: 

Bank of Canada cuts key interest rate to 4.75%. What does that mean for you?

6 months ago

Duration 4:35

The Bank of Canada has lowered its key interest rate to 4.75 per cent, its first rate cut since March 2020. CBC's Dwight Drummond speaks with Moshe Lander, a Concordia University senior lecturer in economics, about what that means for the average person.

"Credibility isn't just about nailing a forecast. It's also about feeling like our institutions see the people they serve on the other side of the numbers," she told CBC News. "Central banks have blunt tools and only so much air time — finding the nuance is a complicated communication challenge."

Convincing Canadians that an institution like the Bank of Canada is working for them may have been a tough task as rates were rising, the economy was slowing and prices were climbing.

Donald says that gets easier in an environment where rates are falling and prices are stable.