Bank of Canada's Beaudry: Core inflation and excess demand led to interest rate hike

"We felt it was necessary," said Bank of Canada Deputy Governor Paul Beaudry on Thursday regarding the 25 basis points rate hike announced on Wednesday. He added that strong household spending and high inflation led to the hike.

Beaudry will speak at the Greater Victoria Chamber of Commerce in a few minutes and will answer questions from reporters.

In his economic progress report, entitled 'Are We Entering a New Era of Higher Interest Rates?,' Beaudry argued that a base-case scenario 'where the real neutral rate remains broadly in its pre-pandemic range is possible, but the risks appear mostly tilted to the upside.'

Key takeaways from the speech: 

“When we looked at the recent dynamics in core inflation combined with ongoing excess demand, we agreed the likelihood that total inflation could get stuck well above the 2% target had increased. Based on this accumulated evidence, we decided to raise the policy rate to slow demand and restore price stability.”

“We’ll have more to say about all of this in our July forecast.”

“We know this tightening cycle has not been easy for many Canadians. But the alternative—not controlling inflation—would be far worse, particularly for people living on low or fixed incomes. When inflation is stable around the 2% target, it removes the anxiety created by large swings in the cost of living.”

Market reaction: 

Beaudry’s comments had no significant impact on the Loonie. The USD/CAD continued to trade steadu around 1.3350/55, modestly lower for the day.