Julie Gordon and David Ljunggren

OTTAWA, Reuters – Given the soaring inflation, the Bank of Canada’s rate policy is “too stimulating” and may have to increase because some parts of Canada are less susceptible to rises, a Bank of Canada official stated on Thursday.

Toni Gravelle (Deputy Governor), spoke with economists in Montreal and stated that the central banks would likely increase its near-term inflation projections because of the ongoing “perfect storm” effect of price increases.

Gravelle stated that a 1% policy rate is “too stimulative”, especially since inflation has been running at an alarmingly high level. Our policy rate should be set at more neutral levels.

The Bank is moving fast to return to neutral. Its range of 2% to 3%. He also reiterated that it was ready to be “as forceful as necessary” in order to reduce demand.

It was a rare fifty basis point rate increase by the Bank of Canada last month. Many expect another large increase to be made at its June 1, decision. Markets are betting that the annual policy rate will remain at 3%.

Gravelle explained that “we may also have to raise rates beyond neutral” because some parts of our economy are less susceptible to rate increases than others. Gravelle pointed out that before the pandemic, households had more savings but less non-mortgage loans.

According to him, the rate rises could make housing demand more robust than originally thought.

If price rises reverse or the housing market slows, then the central bank may pause and enter the neutral range.

Our base case scenario calls for a slowdown of housing activity. Gravelle stated that we might see a slowerdown than expected due to unsustainably high prices and higher indebtedness.

He stated that the central bank does not operate on an “autopilot” or have a “terminal rate”.

Canada saw inflation rise to 6.7% in March for the first time in 31 years. This was the 12th consecutive month that it has been above the Bank of Canada’s 1-3% control level and over three times the target of 2%.

Canadian dollars traded 0.3% less at 1.3030 against the greenback. That’s 76.75 U.S. Cents.