Canadians should expect high interest rates to stick around for the next year or longer, a former Bank of Canada (BoC) governor says.
According to former governor David Dodge, prolonged high interest rates until 2025 will be a necessary tool to reach inflation targets and avoid further economic downturns.
“It’s going to be a long period of what would be considered elevated interest rates,” said Dodge.
“What it will require (disinflation) is continued— rather elevated— interest rates right through 2024, right into 2025.”
The BoC has a stated interest rate target of 2% but there are a few challenges in the way for the Canadian economy.
“It makes it very hard to achieve disinflation when we continue to have growth and when we continue to have by historical standards pretty robust labour markets.”
Last month, the BoC announced it would be raising key interest rate by 25 basis paints to 5% – marking the highest point since 2001.
“The stubbornness of core inflation in Canada suggests that inflation may be more persistent than originally thought,” said the BOC’s report.
“The next stage in the decline of inflation towards target is expected to take longer and is more uncertain. This is partly due to elevated services inflation, which can adjust sluggishly, and uncertainty about expected inflation.”
As of June, Canada has an inflation rate of 2.8%. July’s inflation numbers have yet to be reported.
In 2022, Bank of Canada Governor Tiff Macklem told a House of Commons finance committee that the Liberal government’s sustained stimulus spending during the Covid-19 pandemic contributed to Canada’s current inflation woes.
“If we knew everything a year ago that we knew today, yes I think we should have started tightening interest rates sooner to withdraw the stimulus,” said Macklem.
“(If) there would have been less stimulus in the economy, there would have been less demand, (inflation) would have been less.”
According to a study by the Fraser Institute, Canada spent the most among other advanced economies but achieved the poorest results.
“While governments across Canada, particularly the federal government, increased spending markedly during COVID, it’s now clear we didn’t get much bang for our buck,” said Lakehead University economics professor Livio Di Matteo.