Reply To: Bank of Canada Raises Rates 0.50% With Substantial Upward Revision on Inflation


BOC Gravelle: Rates are too low. May have to lift rates above neutral

BOC will likely further lift is near term inflation forecasts
Our current policy rate 1% is too stimulative
It is possible bank may have to raise rates above neutral because parts of the economy might be less sensitive to hikes than in the past
Stronger housing activity could also cause the BOC to lift rates past neutral
On the other hand the bank may pause hikes as rate enters neutral range, and inflation starts to slow
We could also see a larger than expected housing slowdown due to higher indebtedness and unsustainably higher housing prices
Reiterates that the bank is prepared to be as forceful as needed when it comes to quickly normalizing the policy rate
Main factor in recent C$ weakness despite higher commodity prices is likely strengthen of the US dollar
Recent increasing commodity prices will likely boost business investment by less than half of what is typically expected, in part because investors expect demand for fossil fuels to moderate
Slowdown in a growth does not have to mean high unemployment, by calling overall demand weekend reduce demand for labor and degree of labor shortages
Broadening of the price pressures is a big concern but we are not seeing a repeat of 1970s style stagflation; inflation is much lower, economy is running pretty hot, job market is tight
Employers could stop looking for new workers but keep the ones they have with little impact on the jobless rate; this is a scenario that delivers a soft landing
We are raising rates gradually
A 50 BP rise is a big move for a central bank