Bank of Canada says rates may have to double to fend off 'galloping inflation'

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) -The Bank of Canada will probably have to raise its policy rate to the top of its neutral range, double its current level, and could go higher, to prevent soaring inflation from becoming entrenched, a deputy governor said on Thursday.

Paul Beaudry, speaking to a business audience in the Ottawa area, said the central bank was considering the pace at which it moves to neutral, the 2%-3% range where interest rates neither stimulate nor weigh on growth, along with how high rates may go.

"It is probable that we will have to go to the top of that range," Beaudry said, answering audience questions after his speech. He later added rates could even go "a bit higher."

The central bank on Wednesday increased its policy rate to 1.5% from 1.0%, its second consecutive half percentage point hike, and said it would "act more forcefully" if needed to tame inflation.

When asked by reporters if "more forcefully" included a one-off hike larger than 50-basis-points, Beaudry said the central bank wanted to get to neutral as quickly as possible.

"So that could involve doing more moves in a row, or it could involve bigger moves," he said.

Canada's inflation rate hit 6.8% in April, a 31-year high. Beaudry made clear that while external pressures like the war in Ukraine and supply chain disruptions were driving price increases, very strong domestic demand was adding to the pinch.

"If we don't contain it (domestic demand) we would really have galloping inflation," Beaudry said in the question and answer session.

Earlier he said the bank would provide an initial analysis of its inflation forecast errors when it updates its forecasts in July.

The Canadian dollar was trading 0.6% higher at 1.2577 to the greenback, or 79.51 U.S. cents, its highest in nearly six weeks.

(Reporting by Julie Gordon and David Ljunggren in Ottawa; Additional reporting by Fergal Smith in Toronto; Editing by Jan Harvey and Andrea Ricci)