Bank of Canada concluded waiting to raise rates might solidify inflation expectations and make more aggressive hikes necessary. Read on.
With excess demand and elevated core inflation “proving to be more persistent than expected,” the central bankers looked at two possible scenarios related to the outlook for inflation.
In the second scenario discussed by the central bankers, more restrictive monetary policy was needed to reduce excess demand and bring inflation back to the target of two per cent due to conditions including tight labour markets and household savings still well above pre-pandemic levels, conditions that suggested “demand may continue to be stronger than previously forecast.”Article content
“Members were concerned that inflation remaining above target for this long raises the risk that inflation expectations could settle above what would be consistent with achieving price stability,” the summary said. “Contrary to past experience when inflation expectations responded very little to inflation shocks, the current period of persistent inflation may be causing inflation expectations to remain high.
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