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Bank of Canada Governor Tiff Macklem said that inflation could be “getting close to” the bank’s target by the end of next year, and laid out conditions under which the bank might begin considering rate cuts in the coming quarters.

“The 2 per cent inflation target is now in sight,” Mr. Macklem said in the prepared text of his end-of-year speech in Toronto. “And while we’re not there yet, the conditions increasingly appear to be in place to get us there. The economy is no longer in excess demand, and underlying inflationary pressures are easing in much of the economy.”

He said the bank’s governing council has not begun discussing interest rate cuts, and warned that further declines in inflation would likely be gradual. “I expect governing council will continue to debate whether monetary policy is restrictive enough and how long it needs to remain restrictive,” he said.

But he added that the bank could start easing monetary policy once it’s confident that inflation is “on a sustained downward track.”

“We don’t need to wait until inflation is all the way back to the 2-per-cent target to consider easing policy, but it does need to be clearly headed to 2 per cent,” he said.

While Mr. Macklem and his team continue to say they could raise interest rates further, most Bay Street economists and bond traders think that interest rates have peaked. Interest rate swaps markets, which capture market expectations about monetary policy, put the odds of a rate cut in March at about 60 per cent, and they are fully pricing in a quarter-point rate cut by April, according to Refinitiv data.

The central bank has raised interest rates 10 times since March 2022, bringing its policy rate to 5 per cent, the highest level since the early 2000s. It has held rates steady since July, delivering its third stand-pat decision earlier this month.

Mr. Macklem said that 2024 will be a “year of transition.”

“By the time I give my year-end speech next year, I expect the economy will be growing, business hiring plans will be expanding, and inflation will be getting close to the 2 per cent target,” he said.

The annual rate of Consumer Price Index inflation was 3.1 per cent in October, down from a four-decade high of 8.1 per cent in summer of 2022. The bank’s latest forecast, from October, shows inflation staying around 3.5 per cent until the middle of 2024 then easing to around 2.5 per cent in the second half of the year. The bank will publish new forecasts in January.

Mr. Macklem’s speech bookended a pivotal week for central banks. On Wednesday, the U.S. Federal Reserve held interest rates steady for the third consecutive decision, but suggested that further interest rate hikes are essentially off the table and rate cuts are coming in the new year. This message was more dovish than expected, prompting a surge in stock and bond prices, and increased bets on rate cuts from the Fed in the first half of the year.

The European Central Bank and Bank of England followed up with holds on Thursday, although both central banks avoided the kind of tone shift seen at the Fed. Both said they needed more evidence of easing inflation before talking about rate cuts.

So far, the decline in inflation has not been accompanied by a recession in Canada or the United States that many analysts feared at the start of the year. But high interest rates, which make it more expensive for businesses and households to borrow money and service their debts, are weighing on economic activity.

Canada’s gross domestic product contracted in the third quarter, consumer spending and business investment is down, and the rate of unemployment has risen to 5.8 per cent from 5 per cent at the start of the year. Many homeowners with mortgages have been hit by big jumps in their monthly payments, and more will see sizable increases in the coming quarters when their mortgages reset.

Mr. Macklem warned of more pain to come.

“With the cost of living still increasing too quickly, and with growth subdued, the next two to three quarters will be difficult for many,” he said. “Consumers will continue to hold back on spending. Businesses will see weak demand and employment will grow more slowly than the labour force, which means the unemployment rate will likely increase further.”

When it comes to inflation, Mr. Macklem said the bank is seeing prices stabilize across a broad range of goods and services. But there are pockets where prices continue to rise quickly, including food and shelter. He said he expects food inflation to decline in the coming months, but shelter inflation to remain a more persistent problem.

“Increases in interest rates are moderating the demand for housing and bringing the housing market into better balance, but the structural undersupply of housing means that inflationary pressures on shelter prices remain elevated,” he said.

Mr. Macklem used his speech to outline several changes to central bank communications and forecasting. Going forward, Mr. Macklem and senior deputy governor Carolyn Rogers will hold a press conference after each of its eight-times-a-year rate decisions, rather than only after the four decisions each year that are accompanied by the bank’s quarterly Monetary Policy Report. Rate announcements will also be made at 9:45 a.m. ET rather than 10 a.m. ET in a bid to improve market functioning.

Mr. Macklem said that the bank is also working to improve its forecasting and analysis tools, putting more emphasis on modelling the supply side of the economy and introducing additional models to help with risk management.

The bank’s next interest rate decision is on Jan. 24