“Worst thing” for BoC is a delay on hikes: David Dodge

Former Bank of Canada Governor David Dodge is warning the central bank is at risk of a serious policy error if it fails to act decisively to hike rates in order to quell inflation running at a three-decade high.

Former Bank of Canada Governor David Dodge is warning the central bank is at risk of a serious policy error if it fails to act decisively to hike rates in order to quell inflation running at a three-decade high.

In an interview on BNN Bloomberg, Dodge, now a senior advisor at Bennett Jones LLP, said any delays to increasing the benchmark rate could be a serious issue for the Bank of Canada,

“I think what we have to do is get rates up quickly but not excessively,” he said. “And I think that the worst thing that could happen is that we delay and delay and delay in getting rates up – and this is true not just of Canada – and then we have to ramp them up very rapidly and very suddenly to very contractionary levels, and then we do risk a problem.”

Dodge said he views the neutral rate – an area where the Bank of Canada’s benchmark level neither stokes inflation nor constrains economic growth – as between two and two-and-a-half per cent.

That rate would fall below what many economists expect for the Bank of Canada. Earlier this week, Bank of America Securities Economist Carlos Capistran forecast the Bank of Canada would increase rates by 50 basis points – a half per cent – at each of the next three meetings before hitting a high of 3.25 per cent in early 2023.

Capistran is far from the only economist to forecast an aggressive tightening cycle from the Bank of Canada, with multiple calls for the central bank to increase rates by 50 basis points at upcoming meetings, twice the usual 25 basis point hike.