Impact of rate hikes will be ‘stronger’ than people think: Poloz

The full impact of the rate hike has yet to be felt and will be “even stronger” than many expected, said former Bank of Canada Governor Stephen Poloz.

At a conference in Ottawa hosted by Western University’s Ivey Business School, the former governor warned that today’s economy is more sensitive to interest rates than it was a decade ago.

“Does anyone think the economy is less sensitive to interest rate movements than it was five or ten years ago?” Poloz asked. “I think I’m more sensitive today than I was before.”

Poloz expects annual inflation to naturally drop to about 4% as external factors such as rising commodity prices ease. Statistics Canada’s latest annual inflation rate, which is the latest available data, was 6.9% in October.

He said policy measures need to do the rest to bring inflation down to the central bank’s 2% target.

“I think the actions that are being taken to get us there will prove to be even more powerful than many people think,” Poros said.

High inflation has persisted longer than the Bank of Canada had originally forecast, but Poloz defended using the word “temporary” to describe inflationary pressures, citing international concerns such as supply chain delays. He pointed out that the inflationary factors were already disappearing.

“In other words, externally driven inflation is temporary. You can use the word temporary,” he said.

But the former central bank governor said it would take time for that development to be reflected in the annual inflation rate.

Bank of Canada Governor Tiff Mackrem called inflation “temporary” (meaning temporary) when it first started to rise.

He has since shied away from that characterization, stressing that the domestic economy is overheating and that inflation will not return to target without central bank action.

This report by the Canadian Press was first published on November 24, 2022.