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Effects of prolonged rate hikes will be ‘much stronger’ than people think: Poloz

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Poloz estimates that annual inflation will naturally decline to about four percent as external factors, such as higher commodity prices, ease.

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Canadian press

Nojoud Al Malles

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November 24, 2022 • 4 hours ago • 3 min read Join the Conversation Stephen Poloz, former Governor of the Bank of Canada, delivered the keynote address at a business conference on Thursday, November 24, 2022 in Ottawa. Photo by Adrian Wilde/The Canadian Press

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OTTAWA – The full effects of a rate hike have not yet been felt – and will be “even more powerful” than many expect, former Bank of Canada governor Stephen Poloz said Thursday during Canada’s direction of economic growth. Said in a speech about plotting a route. undetermined time.

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

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“Does anyone here feel that the economy is less sensitive to interest rate movements than it was five or 10 years ago?” Poloz asked. “I think it’s more sensitive today than it was in the past.”

Poloz estimates that annual inflation will naturally decline to about four percent as external factors, such as higher commodity prices, ease. Statistics Canada’s most recent annual inflation rate was 6.9 percent in October.

Policy measures to bring inflation back to the central bank’s target of 2 percent will have to do the rest, he added.

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“I think the actions being taken to get us there will be more powerful than many people think,” Poloz said.

Former Governor Lawrence is chairman of the National Center for Policy and Management, an independent think tank that will be based in Ivey.

Poloz began his remarks by sharing his thoughts on the causes of high inflation and the direction of prices. His speech also offered several recommendations on how Canada can improve long-term economic growth in volatile times.

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He said the think tank will present a summary of its recommendations to Treasury Secretary Chrystia Freeland next week.

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

The Bank of Canada began raising interest rates in March to combat rising inflation. Since then, the central bank has hiked its key interest rate six times in a row, one of the fastest tightening cycles in its history.

The policy rate currently stands at 3.75 percent and is expected to rise again next month.

The aggressive rate hike is expected to significantly slow down the Canadian economy. And while many economists are cautiously optimistic that the recession will not be severe or long-lasting, unions in particular are concerned about the consequences of a potential recession.

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

Economists estimate that it takes one to two years for a rate hike to have a full effect on the economy. That delay makes it difficult to assess whether a rate hike is too high or too low, said the former governor.

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Poloz said trying to slow inflation by raising interest rates is like trying to stop a car with bad brakes.

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

While high inflation lasted longer than the Bank of Canada’s initial forecasts, Poloz defended the use of the term “transient” to describe inflationary pressures, noting in his speech that supply chain delays, such as inflation, are already disappearing to be.

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

However, the former central bank governor says it will take time for that growth to be reflected in annual inflation.

Bank of Canada Governor Tiff McCallum specifically called inflation “volatile” — meaning temporary — when it first started rising.

He has since backed away from that characterization, insisting that the domestic economy is overheating and that inflation will not return to target without central bank action.

While high inflation is at the forefront of 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 government policies that promote stability and clarity for businesses. The less uncertainty about trade policies and projects, for example, the more companies will invest in their operations and improve their productivity, he added.

“Clarity is the clearest antidote to uncertainty.”

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