The BoC has an increasing chance of taking interest rates to 3.0% or higher — Paul Beaudry

Bank of Canada (BoC) Deputy Governor Paul Beaudry said on Thursday that the BoC sees a growing probability that it may need to raise its policy rate to 3% or higher, Reuters reported.

Additional statements:

The risk is now higher that inflation expectations become unanchored and high inflation takes hold.

In discussions ahead of the 50bp rate hike on June 1, the BoC noted that price pressures are widening and inflation is likely to rise further before easing.

The BoC must be – and will be – determined to reduce inflation and will prevent high inflation from consolidating.

The BoC expects strong growth and low unemployment to continue, while interest rate hikes will take time to have their full effect.

The Canadian economy is slipping into excess demand and the economic rebound has been much faster than the BoC anticipated.

The more important of the two forces driving Canadian inflation is largely international and more difficult for monetary policy to address.

Typically, inflationary shocks related to external supply disruptions do not persist for long, so the BoC does not usually react to such shocks.

The BoC opted not to raise rates in 2021 due to what it saw as temporary inflationary shocks from abroad and because the economy continued to run well below capacity for most of the year.

The Boc also opted not to raise rates in 2021 because a premature tightening could have made it harder for people who lost their jobs during the pandemic to find jobs.

The risk of leaving rates low was that higher inflation could start to take hold and the risk seemed appropriate at the time given how loose the economy was at the time.

In July, the BoC will present a first analysis of its inflation forecast errors.