A Bank of Canada deputy governor warned on Thursday that the central bank may need to raise its key interest rate to 3.0% or more to ensure inflation does not take hold.
In the text of a speech to the Gatineau Chamber of Commerce on Thursday, Paul Beaudry said the likelihood of consumer prices rising even further meant the central bank might have to push its key rate to at least the upper end of its “neutral” range, estimated between 2.0% and 3.0%, where it neither stimulates nor hinders growth.
The groundwork for bigger hikes follows the bank’s sharp hike in its benchmark rate to 1.5% on Wednesday.
According to Beaudry, supply chain disruptions during the pandemic have lasted longer than expected, exacerbated by unexpected events like Russia’s invasion of Ukraine and lockdowns in China to protect against COVID -19, which forced the bank to react quickly to put a stop to the price spike.
Beaudry noted that some Canadians believe inflation is already feeding on itself, driven by expectations of even more expensive goods as wages rise to meet rising prices, but he argues that higher rates higher interest rates will balance supply and demand and reduce inflationary pressures.
Annual inflation hit 6.8% in April, posting its fastest year-over-year rise in 31 years, as the price of goods, from gas to food, continued to climb.
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