Bank of Canada needs to hike 'very smartly' to tame inflation: Dodge

Former Bank of Canada Governor David Dodge suggested on the eve of the central bank's policy decision that there's no time to waste if Governor Tiff Macklem wants to "break the psychology" of runaway prices.

Former Bank of Canada Governor David Dodge suggested on the eve of the central bank's policy decision that there's no time to waste if Governor Tiff Macklem wants to "break the psychology" of runaway prices.

In order to bring inflation back to the bank's target of two per cent (within a band of one to three per cent), Dodge said Canada will need some help from fiscal and structural policies, but "he (Macklem) himself is going to have to move interest rates up, and move them up very smartly."

Inflation has been steadily marching higher in Canada, like in other countries, as a series of supply-related shocks have hit the economy. First, as the pandemic walloped global supply chains. And, more recently, Russia's invasion of Ukraine has sent commodity prices surging and raised concern about food security.

Statistics Canada's most recent consumer price index showed inflation surged 5.7 per cent year-over-year in February. That was the highest since August 1991. By contrast, the annual rate of inflation was just 2.2 per cent in February 2020, just before the novel coronavirus fully took hold in this country.

Several economists raised the spectre of inflation expectations becoming unmoored earlier this month when the Bank of Canada released a pair of surveys showing a broad view that prices aren't expected to come down any time soon. The Business Outlook Survey revealed that 70 per cent of business leaders who responded said they anticipate inflation will be more than three per cent over the next two years. And a survey of consumers indicated average Canadians expect inflation will be 5.07 per cent over the next year.

Dodge, who served as governor from February 2001 to January 2008, said it's crucial for the bank to move "very expeditiously" to get its main policy rate back to neutral, which is viewed as a Goldilocks level that neither stimulates nor restricts the economy and allows for stable prices. There is no pre-defined level for neutral. In its January Monetary Policy Report, the Bank of Canada estimated neutral was at the midpoint of a range from 1.75 to 2.75 per cent.