Rampant inflation means Bank of Canada must raise rates above 3%: economist

Click to play video: 'Bank of Canada needs to be straight with Canadians on interest rate hikes: Drummond'
Bank of Canada needs to be straight with Canadians on interest rate hikes: Drummond
WATCH: Bank of Canada needs to be straight with Canadians on interest rate hikes, Drummond says – Jun 19, 2022

Rampant inflation in the Canadian economy means the Bank of Canada will have to raise rates above three per cent to bring things back under control, suggests one economist.

Don Drummond, an economist and fellow with Queen’s University, spoke with The West Block‘s Mercedes Stephenson and said while the Bank has been clearly signalling an intent to raise rates back between its normal two to three per cent range, that’s a “minimum” for what is needed.

“I don’t think that will do the trick. I think the inflation pressures are too embedded,” he said.

“They will have to raise their rates above three per cent.”

Click to play video: 'Risk of recession increases as Canada, U.S. move to tame inflation'
Risk of recession increases as Canada, U.S. move to tame inflation

Drummond’s comments come ahead of an expected update to the inflation rate in Canada this week.

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In April, the last month for which data is available so far, inflation hit 6.8 per cent in Canada — the highest level since 1991 — and an increase compared to the previous month.

Predictions by two major Canadian banks – BMO Economics and RBC Economics – ahead of the May update, expected in the coming days, suggest inflation will have increased again to 7.4 per cent.

Yet Drummond said he worries the federal government isn’t moving quickly enough to stave off spending that is stimulating the economy and contributing to excess demand among consumers.

“The government has to put a little more pressure to try to get back to a balanced budget,” he said. “Not immediately — you don’t want to cause a recession by suddenly withdrawing the stimulus. But keep in mind, their last budget just added more stimulus. They can’t be doing that anymore.”

Deputy Prime Minister and Finance Minister Chrystia Freeland last week highlighted measures valued at $8.9 billion that she said will help Canadians cope with the rising cost of living.

None of the measures, however, were new spending.

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Click to play video: 'Rising inflation rates impact food insecurity in Canada'
Rising inflation rates impact food insecurity in Canada

Instead, all were increases to programs and benefits already accounted for in previous federal budgets.

In her speech, she noted that the forecast for the global economy has “significant uncertainty” amid high inflation, the war in Ukraine and supply chain kinks. But she said she believes the Canadian economy, with its own agricultural output, a low unemployment rate and strong immigration demand, is well suited compared to some if its G7 allies to weather the storm.

“A soft landing is not guaranteed,” she said, referring to a gradual cooling of the economy that skirts a recession.

“There is absolutely no country in the entire world better placed than Canada to achieve that soft landing,” she added.

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But there are signs the Bank of Canada could be preparing to go further if the interest rate hikes within its target range aren’t enough to tamp down on inflation.

The deputy governor of the central bank, Paul Beaudry, issued the warning earlier in June.

“We’re scared that this inflation becomes entrenched,” he said, acknowledging that “inflation is much higher than we expected and likely to go higher still before easing.”

“This raises the likelihood that we may need to raise the policy rate to the top end or above the neutral range to bring demand and supply into balance and keep inflation expectations well anchored.”

– with files from Global News’ Craig Lord.

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