OTTAWA - It is becoming more likely that the Bank of Canada may need to hike its policy interest rate to 3% or higher, double its current level, to prevent soaring inflation from becoming entrenched, a deputy governor said on Thursday.
In a speech to a business audience in the Ottawa region, Paul Beaudry said price pressures were broadening, with inflation much higher than the central bank had forecast and set to increase further 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," said Beaudry.
"Preventing high inflation from becoming entrenched is much more desirable than trying to quash it once it has," he said.
Governor Tiff Macklem in April raised the possibility the Bank could go above neutral, the 2%-3% range where interest rates neither stimulate nor weigh on growth. Beaudry's comments make clear it is increasingly likely.
The Bank of Canada hiked its policy rate to 1.5% from 1.0% on Wednesday, its second consecutive 50-basis-point (bp) increase, and said it would "act more forcefully" if needed to tame inflation at a three-decade high.
Beaudry did not comment on the possibility of a larger than 50-bp increase in the prepared text of his speech. The central bank has said such a move would be very unusual.
He reiterated bringing inflation down to the 2% target was the Bank of Canada's priority, and said it would provide an initial analysis of its inflation forecast errors when it updates its forecasts in July.
The Canadian dollar was trading 0.4% higher at 1.2609 to the greenback, or 79.31 U.S. cents.
(Reporting by Julie Gordon and David Ljunggren in Ottawa; Additional reporting by Fergal Smith in Toronto; Editing by Jan Harvey)