Bank of Canada Deputy Governor Toni Gravelle said borrowing costs need to rise quickly to more normal levels to bring inflation back to target, and that the current policy interest rate of 1 per cent is “too stimulative.”

In a speech Thursday entitled “The Perfect Storm,” Gravelle reiterated that rates need to rise further into the neutral range of 2 to 3 per cent in order to cool domestic inflation and bring the economy back to balance.

“We are taking actions to normalize our policy rate quickly and are prepared to be as forceful as needed,” Gravelle said, according to prepared remarks.

Gravelle said the central bank may pause increases to interest rates at the neutral range if price pressures begin to reverse course, or if heavily indebted Canadian households reduce their spending by more than expected.

Conversely, the deputy governor also made the case for hiking borrowing costs above the neutral range if global supply chain issues persist, or parts of the domestic economy end up being less sensitive to higher interest rates than expected.

“We are not on a pre-set path of policy rate increases aimed at getting to a specific ‘terminal’ rate,” Gravelle said. “Our decisions are not on autopilot.”

The comments will firm up market expectations of a second jumbo rate hike at the bank’s next meeting on June 1, after a 50-basis point increase in April. Investors see Canada’s benchmark interest rate rising above 3 per cent over the next 12 months in one of the most aggressive tightening cycles since the end of last century.

Speaking in Montreal, the deputy governor outlined how higher commodity prices, global supply chain issues, and the reopening of economies are pushing up inflation. Gravelle also said that the bank’s near-term forecasts for price gains are likely to be revised up, adding that “inflation pressures have been higher and more tenacious than we expected.”