Home Business Long-term rate hikes effects will be ‘more powerful’ than people think: Poloz

Long-term rate hikes effects will be ‘more powerful’ than people think: Poloz

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OTTAWA — The full impact of rate hikes has yet to be felt and will be “even stronger” than many expected, former Bank of Canada Governor Stephen Poloz said in a speech Thursday that spoke about how we can chart a path to economic growth.In uncertain times.

At a conference hosted by Western University’s Ivey Business School in Ottawa on Thursday, 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?” Poros 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 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 to get us there will be even stronger than many people think,” said Poloz, citing the growing debt burden in Canada’s economy as a vulnerability.

The former governor chairs the Lawrence National Center for Policy Management, an independent think tank sponsored by Ivy.

Poloz began his remarks by sharing his thoughts on the drivers of high inflation and where prices are heading. His speech also provided a series of recommendations on how Canada can improve its long-term economic growth during uncertain times.

He said the think tank will provide Finance Minister Chrystia Freeland with a summary of its recommendations next week.

Poloz ended his seven-year term as Governor of the Bank of Canada months after the COVID-19 pandemic. Since then, the central bank has dramatically shifted gears from his extraordinary 2020 stimulus package to rapid monetary tightening.

The Bank of Canada began raising interest rates in March to curb rising inflation. Since then, central banks have raised key interest rates six times in a row, embarking on one of the fastest monetary policy tightening cycles in history.

The key rate is currently at 3.75% and is expected to rise again next month.

Aggressive interest rate hikes are expected to slow the Canadian economy significantly. While many economists are cautiously optimistic that the economic slowdown will be severe and short-lived, labor groups in particular are concerned about potential recessionary consequences.

Is the Bank of Canada raising interest rates too much? “Impossible to say,” Poloz said in an interview.

Economists estimate that it will take a year or two for rate hikes to fully impact the economy. The lag makes it difficult to judge whether there are too many or too few rate hikes, the former governor said.

Poloz said trying to curb inflation by raising rates is like trying to stop a car with no brakes.

“It takes a long time to actually decelerate, so you hit the brakes hard, which can lead to accidents,” he said.

High inflation has lasted longer than the Bank of Canada had originally predicted, but Poloz defended the use of the word “temporary” to describe inflationary pressures, noting in his speech that supply chain He pointed out that international inflation factors such as delays are 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.

While high inflation remains at the forefront of economic policy debates, many economists are concerned about what Canada is doing—or not doing—to boost long-term growth.

In his speech, Poloz advocated government policies that promote business stability and clarity. For example, the less uncertainty about trade policies and projects, the more companies will invest in more businesses and increase their productivity, he said.

“Clarity is the obvious antidote to uncertainty.”

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

Nojoud Al Mallees, Canadian Press

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