Bank of Canada appears to have concluded it will need to lift its interest rate to at least 3% to keep inflation from becoming entrenched
That’s a quarter point shy of the pre-pandemic rate of 1.75 per cent, which was as high as policymakers managed to push the rate during the tortured recovery that followed the Great Recession. The economy never really gathered significant momentum over the decade that followed the 2008-09 financial crisis, precipitating an environment of weak inflation that left central bankers looking over their shoulders for a re-emergence of deflationary forces.
“Price pressures are broadening and inflation is much higher than we expected and likely to go higher still before easing,” Beaudry said.that all the inflation gauges it watches to separate “core” prices from volatile swings in the cost of food and energy now exceed three per cent. That’s a problem for households who must suddenly cope with a higher cost of living.
But perhaps the clearest signal of a shift was Beaudry’s guidance in his speech to the Gatineau Chamber of Commerce that the policy rate probably will need to go outside its neutral range to restrain economic growth. “Neutral” is a theoretical rate that neither stokes or chokes economic growth. The Bank of Canada estimates that Canada’s neutral rate is between two per cent and three per cent.
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