They give the central bank the tools it needs to manage runaway inflation
While the Bank of Canada’s rate hikes might be a burden to consumers at present, the upward trajectory of the last few months will help avert the multiple risks presented by sustained inflationary pressures, according to the institution’s senior deputy governor.
“The longer inflation expectations remain high, the greater the risk that elevated inflation becomes entrenched,” said Carolyn Rogers. “If that were to happen, higher inflation could become self-fulfilling, and a damaging cycle would be set in motion.”
Rogers argued that inaction on the central bank’s part will entail a much higher economic cost when it comes to restoring price stability.
“This led to our decision to raise the policy interest rate by 75 basis points to 3.25%,” Rogers said. “By front-loading interest rate increases now, we’re trying to avoid the need for even higher interest rates down the road and a more pronounced slowing of the economy.”
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Rogers said that more hikes are on the horizon, which will help give the BoC the tools it needs to manage runaway inflation.
“As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target,” Rogers said.
“Because we are in a period of excess demand, we need a period of lower growth to balance things out and bring demand back in line with supply. The reduced spending that results from this rebalancing will ultimately lead to lower inflation.”
