The full effect of interest rate hikes has yet to be felt — and it will be “even more powerful” than many expect, former Bank of Canada Governor Stephen Poloz said Thursday.
Speaking at a conference in Ottawa hosted by Western University’s Ivey Business School, the former governor warned Thursday that today’s economy is more interest rate sensitive than it once was. was 10 years ago.
“Does anyone here think that the sensitivity of the economy to changes in interest rates is less today than it was five or ten years ago?” Mr. Poloz asked. I think (it’s) more sensitive today than before. »
Poloz estimates that annual inflation will fall on its own to around 4% as external factors, such as rising commodity prices, subside.
Annual inflation was 6.9% in October, the most recent data available from Statistics Canada.
Political action will have to do the rest of the work to bring inflation back to the central bank’s 2% target, Poloz said.
“I think the actions that are being taken to get us there will turn out to be even more powerful than a lot of people realize,” he said.
Although high inflation has persisted longer than the Bank of Canada’s initial projections, Poloz defended the use of the word “transitory” to describe inflationary pressures, noting that international factors contributing to inflation, such as that supply chain delays were already dissipating.
“In other words, the part of inflation that is externally driven is really transitory. It’s okay to use the word transitional,” he argued.
However, the former central bank governor says it takes time for this development to be reflected in annual inflation.
The Governor of the Bank of Canada, Tiff Macklem, notably described inflation as “transitional” — that is, temporary — when it began to run high.
He has since moved away from that characterization and pointed out that the domestic economy was overheating and that inflation would not return to target without central bank action.