Effects of long-term rate hikes will be ‘more powerful’ than people think: Poloz

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OTTAWA — The full effects of the interest rate hikes have yet to be felt, and they will be “even more powerful” than many anticipate, former Bank of Canada Governor Stephen Poloz said Thursday in a speech about the ways Canada can chart a path to economic growth during uncertain times.

Speaking at a conference hosted by Western University’s Ivey School of Business in Ottawa on Thursday, the former governor warned that today’s economy is more sensitive to interest rates than it was 10 years ago.

“Does anyone here think that the economy’s sensitivity to interest rate movements is less today than it was five or ten years ago?” Poloz asked. “I think it’s more sensitive today than before.”

Poloz estimates that annual inflation will fall to around 4 percent on its own as external factors, such as rising commodity prices, ease. Statistics Canada’s most recent annual inflation rate stood at 6.9% in October.

He said policy action will have to do the rest of the work to bring inflation back down to the central bank’s 2 percent target.

“I think the actions that are being taken to get us there are going to turn out to be even more powerful than many people realize,” Poloz said, citing higher debt loads in the Canadian economy as a vulnerability.

The former governor is the president of the Lawrence National Center for Policy and Management, an independent think tank housed at Ivey.

Poloz began his remarks by sharing his thoughts on the drivers of high inflation and where prices are headed. Her speech also offered a number of recommendations on how Canada can improve long-term economic growth during volatile times.

He said the expert group will provide a summary of the recommendations to Finance Minister Chrystia Freeland next week.

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

The Bank of Canada began raising interest rates in March to stem rising inflation. Since then, the central bank has raised its key interest rate six consecutive times, kicking off one of the fastest monetary-policy tightening cycles in its history.

Its key rate currently stands at 3.75 percent and is expected to rise again next month.

Aggressive rate hikes are expected to significantly reduce the Canadian economy. And while many economists are cautiously optimistic that the slowdown will not be severe or long-lasting, labor groups in particular have worried about the consequences of a possible recession.

Is the Bank of Canada going overboard with its rate hikes? “It’s impossible to say,” Poloz said in an interview.

Economists estimate that interest rate hikes take a year or two to have their full effect on the economy. That delay makes it hard to judge whether rate increases are too much or too little, the former governor said.

Poloz said that trying to curb inflation with interest rate increases is like trying to stop a car with bad brakes.

“It takes a long time to slow down, so you hit the brakes very hard. Well, then you’re also going to cause an accident,” he said.

Although high inflation has persisted longer than the Bank of Canada’s initial projections, Poloz defended the use of the word “transient” to describe inflationary pressures, noting in his speech that international contributors to inflation, such as delays in the supply chain, are already dissipating.

“In other words, the part of inflation that is externally driven is actually transitory. It’s okay to use the word transitory,” he said.

However, the former central bank governor says it takes time for that development to be reflected in the annual inflation rate.

Bank of Canada Governor Tiff Macklem notably called inflation “transitory,” meaning temporary, when it began to rise.

Since then, he has moved away from that characterization, emphasizing that the national economy is overheated and that inflation will not return to target without central bank action.

While high inflation has come to the fore in economic policy discussions, many economists are concerned about what Canada is doing or not doing to promote long-term growth.

During his speech, Poloz advocated for government policies that promote stability and clarity for businesses. The less uncertainty there is about trade policy and projects, for example, the more companies will invest in their operations and improve 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, The Canadian Press

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