Bank of Canada could hike interest rates past 3% in bid to bridle inflation

inflation

The deputy governor of the Bank of Canada says it may need to raise its key interest rate to three per cent or beyond to ensure inflation does not become entrenched.

In a speech to the Gatineau Chamber of Commerce this morning, Paul Beaudry said the likelihood of even higher consumer prices on the horizon means the central bank may need to push its policy rate at least to the top end of its "neutral" range – between two and three per cent, which neither stimulates nor hampers growth.

The groundwork for more oversized hikes follows the bank's big increase to its benchmark rate yesterday to 1.5 per cent.

Beaudry says supply chain disruptions during the pandemic lasted longer than anticipated, exacerbated by unexpected events like Russia's invasion of Ukraine and COVID-19 lockdowns in China, resulting in the bank's scramble to put a lid on soaring prices.

Beaudry says some Canadians feel inflation is already feeding on itself, driven by expectations of even costlier goods as wages rise to meet mounting prices in a self-fulfilling cycle, but he maintains that higher interest rates will bring demand and supply into balance and ease inflationary pressures.

The annual pace of inflation rose to 6.8 per cent in April, the fastest year-over-year rise in 31 years, as the price of goods from gas to groceries continued to climb.