Full effects of interest rate hikes will be even more powerful than many anticipate

Full effects of interest rate hikes will be even more powerful than many anticipate

OTTAWA - The full effects of interest rate hikes have yet to be felt and will be even more powerful than many anticipate, former Bank of Canada governor Stephen Poloz says.

Is it true that the sensitivity of the economy to interest rate movements is less today than it was five or 10 years ago? Poloz asked. Today, I think it is more sensitive than before. On its own, Poloz estimates that annual inflation will fall to about four per cent as external factors, such as higher commodity prices, ease. The most recent available data shows that the most recent annual inflation rate of Statistics Canada was at 6.9 per cent in October. He said policy action will need to do the rest of the work to get inflation back to the central bank's two per cent target.

Poloz said that the actions being taken to get there will be even more powerful than a lot of people think. Poloz defended the use of the word transitory to describe inflation pressures, noting that international contributors to inflation such as supply chain delays are already dissipating, despite the fact that high inflation has persisted longer than the Bank of Canada's initial projections.

Stephen Poloz thinks Canada can solve labour shortages and its lagging loonie In other words, the part of inflation that is externally driven really is transitory. He said it is OK to use the word transitory. The former central bank governor says it takes time for that development to be reflected in the annual inflation rate. When it first started rising, the Bank of Canada governor Tiff Macklem called inflation transitory — meaning temporary. He has backed away from that characterization and has emphasized that the domestic economy is overheated and inflation won't return to target without action from the central bank.