OTTAWA: The Bank of Canada will probably have to raise its policy rate to the top of its neutral range, double its current level, and could go higher, to prevent soaring inflation from becoming entrenched, a deputy governor said on Thursday.
Paul Beaudry, speaking to a business audience in the Ottawa area, said the central bank was considering the pace at which it moves to neutral, the 2%-3% range where interest rates neither stimulate nor weigh on growth, along with how high rates may go.
“It is probable that we will have to go to the top of that range,” Beaudry said, answering audience questions after his speech. The central bank on Wednesday increased its policy rate to 1.5% from 1.0%, its second consecutive oversized hike.
“We are not doing things automatically,” Beaudry said. “We want people to know we are committed to getting inflation to 2% and if we have to we will potentially move more quickly and even a bit higher (than the range).”
Governor Tiff Macklem in April raised the possibility the Bank could go above neutral. Beaudry’s comments make clear it is increasingly likely.
The Bank of Canada, after raising its policy rate by 50 basis points on Wednesday, said it would “act more forcefully” if needed to tame inflation at a three-decade high.
Beaudry did not comment on the possibility of a larger than 50-bp increase in the prepared text of his speech. The central bank has said such a move would be very unusual.
He reiterated bringing inflation down to the 2% target was the Bank of Canada’s priority. “If we don’t contain it (domestic demand) we would really have galloping inflation,” Beaudry said in the question and answer session.
Earlier he said the bank would provide an initial analysis of its inflation forecast errors when it updates its forecasts in July.
The Canadian dollar was trading 0.6% higher at 1.2577 to the greenback, or 79.51 U.S. cents, its highest in nearly six weeks.
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