The chief economist for one of the world’s largest pension funds says the Bank of Canada is likely to let inflation run hotter for longer and keep interest rates low into 2023 to bolster growth.

Millan Mulraine of the Ontario Teachers’ Pension Plan said the central bank will wait almost two more years to raise borrowing costs to ensure a full economic recovery from the pandemic has taken hold. The benchmark overnight lending rate has been 0.25 per cent since late March of 2020.

“They want to go later. They want to ensure the self-sustaining recovery takes shape and that the output gap closes,” Mulraine said during a panel discussion at the Bloomberg Canadian Fixed Income Conference on Tuesday. “They will go on or just after the output gap closes.”

Mulraine said policy makers are underestimating price pressures and that inflation could shoot well beyond the central bank’s target over coming years, ultimately requiring more aggressive interest-rate hikes. 

Canada, like nations around the world, is seeing a period of fast inflation from factors related to pandemic reopening like supply-chain bottlenecks and rising gasoline prices. Annual inflation has exceed the top end of the bank’s 1 per cent to 3 per cent target range for five consecutive months. 

Beata Caranci, the chief economist at Toronto-Dominion Bank, said at the same forum that she expects the central bank to raise rates in the fourth quarter of next year. That’s broadly in line with how other economists and traders have been interpreting remarks from policy makers stating that they will keep rates low until the output gap is closed.

Stefane Marion, chief economist at National Bank Financial in Montreal, said he broadly agrees with the Bank of Canada’s view that the output gap will close in the second half of 2022. There’s a risk “it could very much come sooner, depending on how the global economy and the global supply chain evolves.”

Marion noted that Canada’s labor market is close to reaching pre-pandemic employment levels and the country has benefited from strong commodity prices this year.

Markets have priced in two rates hikes from the Bank of Canada within a year, according to swaps trading.