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The Economic Brief 

So last week, the Bank of Canada raised interest rates by another 25 basis points. And even though we didn&#8217;t expect that this is the start of a renewed cycle that&#8217;s going to see interest rates rise for a long period of time.
We should probably expect one more move in the next couple of months, which will take the interest rate to 5%.
The trouble that policymakers have at the moment in getting inflation under control is that monetary policy is really the only game in town.
Government policy, fiscal policy, if anything, seems to be pushing in the other direction.
Government spending is still contributing to GDP, and government hiring is one of the reasons why the labour market at the moment is so tight.
The issue with relying exclusively on monetary policy to get and keep inflation under control is that there are unintended consequences.
High interest rates also negatively impact homebuilding, business investment plans, which are necessary to keep inflation under control in the longer term.
The good news, though, is that as we look forward to 2024, as long as governments don&#8217;t add significantly to spending plans at upcoming budgets and mid-year updates, we do think that by next year there will be a more rounded policy mix.
Government spending won&#8217;t be quite as positive from a growth point of view and that will allow us to get and keep inflation under control without necessarily needing the high interest rates that we see today.

Are further interest rate hikes the only way to control inflation?

Andrew Grantham

Senior Economist

CIBC