Vice Governor of Bank of Canada said they may need to raise the base rate to 3% or higher to ensure inflation does not decline in the long run.
“We fear that this inflationary become entrenched,” Paul Beaudry told reporters Thursday afternoon.
In an earlier speech to the Gatineau Chamber of Commerce, he said the possibility of even higher consumer prices coming up meant the central bank would consider pushing its policy rate at least high. the top of the “neutral” range – between two and three percent, neither promoting nor hindering growth.
“Price pressures are mounting and inflation is much higher than we expected and is likely to continue higher before easing,” Beaudry said.
“This raises the possibility that we may need to raise policy rates to the top or above neutral levels to bring supply and demand into balance and keep inflation expectations well maintained. ”
Year-over-year inflation accelerated to 6.8% in April, the fastest year-on-year increase in 31 years as prices for goods ranging from gas to groceries continued to rise.
The basis for the oversized rallies comes after the Bank of Canada on Wednesday increased its benchmark rate, bringing it to 1.5%. The move marks the first consecutive half-point increase since rate announcements were expected to begin in 2000. In April, the bank raised interest rates by half a percentage point to one percent. .
Beaudry said supply chain disruptions during the pandemic lasted longer than the central bank anticipated, exacerbated by unexpected events like Russia’s invasion of Ukraine and the COVID-19 lockdown in China.
He said some Canadians feel inflation is picking up on its own, fueled by expectations of even more expensive goods and services as wages rise in response to escalating prices in a natural cycle. consolidate. Still, he maintains that pandemic-related supply issues are the main driver of the staggering price tags and that higher rates will reduce demand relative to supply, easing inflationary pressures.
The Bank made changes to its directional interest rate in an attempt to control inflation with a target of 2%. The rate hike is intended to cool borrowing and spending by increasing the cost of benchmark-related loans, including variable-rate mortgages.
“The longer inflation stays above our target, the more likely it is to factor in inflation expectations and the greater the risk of inflation becoming self-fulfilling,” Beaudry said.
“History shows that once high inflation has persisted, it can be difficult to bring it down without severely hampering the economy.”
Global pressures coupled with low domestic unemployment is likely to push inflation past the bank’s previous forecast of nearly 6% for the first half of the year, it said on Wednesday.
Beaudry said spending-loving households and businesses are overheating the economy, although signs of a slowdown from three rate hikes since March have been evident, particularly in markets. housing school.
According to the Canadian Real Estate Association, home sales fell 12.6% in April and were a quarter lower than sales figures from April 2021. The home price index fell 0.6% month-on-month. before.
“We think we can contain this without necessarily going into a recession-type area,” Beaudry told reporters.
Optimism about inflation is not too broad. A March survey from the Federation of Canadian Independent Businesses found that small business owners expected their average price to increase by 4.7% in 12 months.
“That’s really what worries us,” said Beaudry, referring to inflation expectations that span one to two years. “The good part is, looking beyond – five years from now – people are confident that we’ll bring it back.”
The bank is also easing its pandemic-era stimulus measures by continuing so-called quantitative tightening, starting in April, as the government bonds it holds are no longer being substituted as they mature. .
Asked if Pierre Poilievre, who is widely seen as the frontrunner in the federal Conservative leadership race, was fair to ask that Bank of Canada Governor Tiff Macklem be fired for acting as a “machine” ATM” of the Liberal government or not, Beaudry replied: “No… We are not in the business of politics.”
“We have not managed to keep inflation at our target level, so it is appropriate for people to question us,” he added.
The bank expects Canadian government bond holdings, which stood at $440 billion at the end of last year, to fall to $280 billion by the end of 2023, down 35% over two years.
© 2022 Canadian Press
