Persistent economic strength led to latest rate increase, Beaudry says
Continued strength in the Canadian economy is likely to keep interest rates higher for an extended period to control inflation, according to the central bank’s deputy governor.
Paul Beaudry said in a speech to the Greater Victoria Chamber of Commerce on June 8 that recent robust economic data influenced the Governing Council’s latest decision to hike rates by 25 basis points.
He emphasized the need for Canadians to prepare for a prolonged period of higher interest rates to bring cost pressures back to the bank's target of two percent.
Beaudry said it was “more likely that long-term real interest rates will remain elevated relative to their pre-pandemic levels than the opposite.”
He cautioned against poor planning in the face of higher rates, citing recent tremors in the global banking sector as an example.
The Bank of Canada’s latest move was based on stubbornly high inflation, a resilient Canadian economy, and a robust labour market, Beaudry suggested.
“The accumulation of evidence across a range of economic indicators suggests that excess demand in the Canadian economy is more persistent than we thought, and this increases the risk that the decline in inflation could stall,” he said. “That’s why we decided to raise the policy rate.”
The move marked the first rate increase since January, signalling a departure from the central bank's pause to assess data. Economists believe that this move may lead to further rate hikes throughout the year, with some anticipating another hike in July.
Beaudry did not provide hints regarding the economists' predictions or specific guidance on future interest rates.
He mentioned that the central bank's analysis suggests the neutral rate, which neither hampers nor encourages economic growth, has not deviated significantly from its pre-pandemic range.
The Bank of Canada currently estimates this range to be between 2% and 3%. Beaudry acknowledged that the risks appear tilted to the upside.
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