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Getting inflation back to normal

Speaking a day after the Bank of Canada raised interest rates, Senior Deputy Governor Carolyn Rogers discusses where the economy stands and what the Bank is doing to get inflation back under control.

Watch Senior Deputy Governor Rogers speak to Calgary Economic Development by webcast. Read the full speech.

Our policy rate decision

We decided to raise the policy interest rate by 75 basis points to 3.25% and continue quantitative tightening.

The Canadian economy is running hot

Over the summer, the consumer price index dropped slightly—to 7.6% in July from 8.1% in June.

While overall inflation may have peaked, most of the drop was due to gasoline prices. Inflation has continued to rise and broaden across goods and services. And globally, we’re still seeing supply chain bottlenecks and high commodity prices, both of which contribute to inflation here in Canada.

Domestically, demand continues to outpace supply. Consumer spending, particularly on services, was robust in the second quarter of 2022. And significant labour shortages persist, with the unemployment rate at its lowest level ever.

While housing resales and house prices dropped from unsustainably high levels, the Canadian economy remains in excess demand, and inflation is more and more broad-based.

Interest rate increases take time to work

We know that, for many Canadians, higher rates add to the burden they already face with high inflation. Still, we need to raise interest rates to bring inflation down.

Inflation won’t come down overnight. Monetary policy works like a chain reaction or sequence of events—a sequence that takes time. Changes to the Bank’s policy rate affect different households and sectors of the economy differently and at different speeds.

The housing market is one sector where higher rates are felt immediately. But it takes longer for interest rates to bring down price growth on things that aren’t directly tied to borrowing.

Given the lag between changes to interest rates and their impact on inflation—and the considerable uncertainty surrounding the outlook—getting inflation all the way back to 2% will take some time. We also know there could be bumps along the way.”

With inflation well above our 2% target and short-term inflation expectations remaining high, elevated inflation could become entrenched.

By front-loading interest rate increases now, we’re trying to avoid the need for even higher interest rates and a more pronounced slowing of the economy down the road.

Looking ahead

Going forward, we’ll pay close attention to three areas of particular interest:

  • Are higher interest rates working to slow demand? If consumer spending moderates and labour demand eases, pressure on prices should decline.
  • Are global supply disruptions improving? If they are, how fast will this be translated into lower costs for Canadian businesses? Of course, unexpected global events could further disrupt supply and push prices up even more.
  • Most importantly, are inflation and inflation expectations coming back down? If they are, short-term momentum should indicate how deep-rooted price pressures are.

Given the outlook for inflation, we continue to judge that the policy interest rate will need to rise further. As the effects of tighter monetary policy work through the economy, we will assess how much higher interest rates need to go to return inflation to target.

We have a careful eye on many different things—we have a lot of work ahead of us, and we will not rest easy until we can get inflation back to target.”

Watch Senior Deputy Governor Rogers answer questions from the media following her speech.

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