Bank of Canada did 'the right thing' by increasing interest rate quickly: former BoC governor

OTTAWA -

Former Bank of Canada governor David Dodge says the current head of the central bank made the right decision to increase the key interest rate as quickly as he did in an effort to staunch inflation.

In an interview on CTV’s Question Period with Joyce Napier airing Sunday, Dodge said many central banks misjudged the speed of recovery following the early days of the COVID-19 pandemic, so they took too long to make significant interest rate increases they needed to keep inflation low.

“I think the right thing was to go fast because they started too late,” he said. “All the central banks started too late, but particularly here in North America, where we have had very, very strong recovery.”

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“We've never had a recovery as rapid as the one we had in 2021,” he added. “It was incredible.”

The Bank of Canada once again hiked interest rates this week — its sixth increase since March — to 3.75 per cent, a 0.5 per cent increase.

Bank of Canada Governor Tiff Macklem said during a press conference on Wednesday Canadians can expect additional increases before the end of the year. He added the Canadian economy is slowing down, but he stopped short of using the word “recession.”

“We actually do need to slow the economy to relieve the price pressures,” Macklem said during Wednesday’s press conference. “But when we get through this slowdown, growth is going to pick up, the economy is going to grow solidly, and we're going to have low and predictable inflation. That's the destination.”

Macklem and the central bank have faced criticisms from federal party leaders over the decision to continue increasing its key interest rate. During the Conservative Party leadership election, now-Conservative Leader Pierre Poilievre called for the governor to be fired over his inability to keep inflation at 2 per cent, while NDP Leader Jagmeet Singh told CTV’s Question Period earlier this month “there’s absolutely no merit” to the Bank’s approach of increasing rates so rapidly.

But Dodge disagrees. He said while the final objective remains the same — to likely hit 4 or 4.25 per cent by the end of the year — Macklem made the right decision to opt for rapid increases.

“The right thing was to go very fast,” Dodge said. “The right thing is to not go too far, because we know that the impact of what we've done is only going to come out next spring, and we don't know what else is going to be going on in the world next spring.”

“You need to have a little bit of flexibility,” he added. “So my judgment is they've been doing a very good job.”

Dodge also stressed as the important thing is “not to allow inflation to become entrenched,” as talk of a looming recession continues amongst experts.

Finance Minister Chrystia Freeland is set to give an update on the state of the Canadian economy during the federal government’s fall economic statement on Nov. 3, and while she’s signalled in recent weeks the Liberals are trying to hold back on spending, a trio of affordability measures are currently in the works.

Bill C-31, for a one-time $500 credit for low-income renters, and dental benefits for some children under 12, passed third reading in the House of Commons this week. And Bill C-30, the GST rebate, has already passed through the Senate.

“I expect that the federal government will do a little bit to try to help those folks right at the bottom of the income scale that are particularly hard hit,” Dodge said of what he expects from this week’s fall economic update. “And that is understandable, but they don't want to add fuel to the fire (by spending too much).”