Rising rates add to financial ‘burden’ but needed to fight inflation: Bank of Canada

A senior official at the Bank of Canada conceded in a speech Thursday that aggressive hikes to its benchmark interest rate this year are ratcheting up the pressure on Canadian households, but maintained they are needed to keep rampant inflation from becoming “entrenched.”

Senior deputy governor Carolyn Rogers spoke to a business audience in Calgary on Thursday, one day after the central bank delivered its fifth consecutive rate hike of 2022 — an oversized jump of 75 basis points.

While Rogers acknowledged in her speech that the annual inflation rate had dropped in July from its likely peak the month before, she attributed most of the decline to gas prices and said the central bank’s core inflation measures remain high and broad-based.

“This shows how strong underlying inflation remains in Canada,” she said.

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Global shipping rates have declined to roughly 50 per cent of their levels in September 2021, Rogers said, pointing to a slowdown in demand that could alleviate strained supply chains.

But Canadian businesses are “not yet seeing major relief on the supply front,” she said, suggesting a limited impact on inflation so far at home.

While the housing sector has slowed significantly as borrowing rates rise, she said domestic demand is also remaining strong despite rising rates, especially in the services sector.

Rogers noted higher interest rates — the central bank has sprinted ahead with 300 basis points worth of increases in just six months — would take up to two years to have their “full effect” on inflation.

She conceded that higher rates are “adding to the burden” many Canadians are facing with the surging cost of living, but maintained that hiking the cost of borrowing and cooling the economy is “necessary to bring inflation down.”

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Given the uncertainty on the global stage — Russia’s war in Ukraine and the COVID-19 pandemic continue to upend economic forecasts — Rogers said the Bank of Canada’s efforts to fight inflation will likely face some “bumps along the way” but rates will continue to rise until the institution believes the task is in hand.

“We are determined to get this job done,” she said.

— with files from Reuters

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