Rampant inflation means Bank of Canada must raise rates above 3%: economist

Rampant inflation in the Canadian economy means the Bank of Canada will have to raise rates above three per cent to bring things back under control, suggests one economist.

Don Drummond, an economist and fellow with Queen’s University, spoke with The West Block‘s Mercedes Stephenson and said while the Bank has been clearly signalling an intent to raise rates back between its normal two to three per cent range, that’s a “minimum” for what is needed.

“I don’t think that will do the trick. I think the inflation pressures are too embedded,” he said.

“They will have to raise their rates above three per cent.”

Drummond’s comments come ahead of an expected update to the inflation rate in Canada this week.

In April, the last month for which data is available so far, inflation hit 6.8 per cent in Canada — the highest level since 1991 — and an increase compared to the previous month.

Predictions by two major Canadian banks – BMO Economics and RBC Economics – ahead of the May update, expected in the coming days, suggest inflation will have increased again to 7.4 per cent.

Yet Drummond said he worries the federal government isn’t moving quickly enough to stave off spending that is stimulating the economy and contributing to excess demand among consumers.

“The government has to put a little more pressure to try to get back to a balanced budget,” he said. “Not immediately — you don’t want to cause a recession by suddenly withdrawing the stimulus. But keep in mind, their last budget just added more stimulus. They can’t be doing that anymore.”

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