Bank of Canada Tells Senate Inflation Will Be High For Years, End of Emergency Policies

Canada’s central bank increasingly sounds like it doesn’t believe its transitory narrative. In a speech to the Senate committee today, the Bank of Canada (BoC) Governor updated lawmakers on monetary policy. He repeated mostly highlights from last week’s meeting, including the end of stimulus. He also warned households to prepare for higher rates, as they try to control inflation. Here are the key takeaways from today’s speech.

Canada Is Ending Its Emergency Stimulus Policies 

The Governor stressed Canada no longer needs extraordinary monetary stimulus. They’ve wrapped up quantitative ease (QE) and ended its commitment to hold a 0.25% overnight rate. Last week’s announcement was a warning shot for households. He’s warned higher rates are coming, following his warning in December. Rushing in like a freight train, clearly.

Canadians Should Prepare For Higher Interest Rates

Canadian interest rates will rise to control inflation, as the BoC eases its transitory narrative. The Governor did mention he expects some pressures to pass, but mostly skipped over it. After the US Federal Reserve and your largest bank say it’s not transitory, it’s hard to defend.

Instead the central bank focused on rising capacity pressures, and how it will address them. “ …with Canadian labor markets tightening and evidence of capacity pressures increasing, the Governing Council expects higher interest rates will be needed to bring inflation back to the 2% target,” said the Governor.  

Several Canadian banks have argued Canada has been ready for almost a year. Labor and real estate are even stronger than when rates last climbed. However, last week was the first time the BoC recognized inflation won’t just go away in the summer.

Canadians Should Expect Elevated Inflation As Late As 2024

Canadian inflation will remain high but taper towards the second half of 2022 — but it will still be way above target. The Governor said they see inflation around 5% for the first half, tapering down to 3% by the year-end. “Further out, we expect inflation will gradually return close to the 2% target over 2023 and 2024,” he said. 

BoC research shows it takes 18 to 24 months for a change in monetary policy to reach the market entirely. This would be along the same timeline, with the Governor’s 2023 to 2024 forecast. More bluntly, they should have been raising rates a year ago if they wanted high inflation to end this year. That’s when prominent economists began warning rates should rise. 

Worth a mention is the BoC recently hiked its forecast for inflation last week. Inflation forecasts have been rising at the BoC, as the transitory narrative crumbled. Noting that point, many people are doubting the central bank can be as aggressive as it sounds. They’ve so far leaned on the side of being overly generous, inequality be damned. However, at least one bank sees the BoC needing to use quantitative tightening (QT) to keep up with the US, which can withstand much higher interest rates.