Unwinding Pandemic Stimulus: The Bank of Canada’s Narrow Path to Successful Policy Normalization

Abstract

Canada’s delayed monetary policy shift to contain inflation through significantly higher interest rates faced difficult challenges even before Russia invaded Ukraine. This paper explores issues and risks in the Bank of Canada’s (BoC’s) reactive yet vital policy pivot this spring. It examines lessons from the BoC’s success during COVID-19’s economic crisis and problems from its ultra-easy policy when it continued for too long. The path to success of an economic soft landing through higher policy rates has grown much narrower given the combined inflationary pressures from global growth, supply chain stresses, and the war in Ukraine.