“Price pressures are widening and inflation is much higher than expected and is expected to rise further before easing,” he said Thursday morning.
“This increases the likelihood that we will need to raise the policy rate to the upper end or above the neutral range to balance supply and demand and keep inflation expectations well anchored.”
Preparations for bigger hikes follow the Bank of Canada’s sharp hike in its benchmark rate on Wednesday for the second time in two months – a half-percentage-point increase to 1.5%.
The move marked the first consecutive half-point hikes since scheduled rate announcements began in 2000. In April, the bank raised the rate by half a percentage point to 1%.
Beaudry said supply chain disruptions during the pandemic have lasted longer than expected, exacerbated by unexpected events like Russia’s invasion of Ukraine and Covid-19 lockdowns in China, driving the scramble from the bank to put a stop to soaring prices.
He said some Canadians believe inflation is already feeding on itself, driven by expectations of even more expensive goods as wages rise to meet rising prices in a self-feeding cycle. . But he argued that pandemic-related supply issues are the main driver of sky-high prices and that higher rates will drive down demand relative to supply, easing inflationary pressures.
The bank modifies its trend interest rate in order to control inflation with a target of 2%.
“The longer inflation stays above our target, the more likely it is to fuel inflation expectations, and the greater the risk that inflation will become self-fulfilling,” he said.
“History shows that once high inflation takes root, it is difficult to roll it back without severely hampering the economy.”
The annual pace of inflation rose to 6.8% in April, the fastest year-on-year rise in 31 years, as the price of goods from gas to groceries continued to climb .