For over a year, Canada’s central bank has been raising its benchmark overnight interest rate – now set at 4.75 per cent – in a bid to bring down inflation.

The hope is that the rate tightening cycle will clamp down on the broader economy enough to help wrestle inflation back to the Bank of Canada’s target two per cent. That has proved trickier than anticipated so far, with inflation at 4.4 per cent as of the latest reading from Statistics Canada.

So, besides interest rate hikes, what other options are there to control rising consumer prices?

Experts told BNN Bloomberg that policymakers have a range of tools they could deploy to bring down inflation, from bond inventories to tax hikes, though some options are more politically feasible than others.


Jay Zhao-Murray, FX market analyst at Monex Canada, said the Bank of Canada generally has three tools it can use to fight high inflation, and it is already employing all of them to some degree: interest rates, its balance sheet, and communications with the Canadian public.

Interest rates have been the focus for the Bank of Canada so far.

The central bank’s balance sheet – involving its inventory of government bonds – offers another policy approach known as “quantitative tightening,” Zhao-Murray said, “which is just a fancy way of saying that they're letting the bonds that they purchased during COVID mature and then roll off so that they won't own them anymore.”

He noted, however, that there is “mixed consensus” on how well this approach works with controlling inflation.

John Murray, a former deputy governor at the Bank of Canada and current senior fellow at the C.D. Howe Institute, told BNN Bloomberg last week that he thinks the central bank could employ more “active” quantitative tightening in the current inflationary cycle, “where they would actually sell out of their inventory, rather than simply waiting for them to mature.”

“To date, the bank has been following a rather passive strategy with regard to running down its bond inventory, letting them mature and then fall off,” he said in a television interview. “I think something a little more active might be interesting and useful.”

BlueShore Financial advisor Claudio Chisani said selling off government bonds at a lower price would increase their yield, and as those bonds are linked to some mortgage rates, that would “put a little bit of a break on consumption in Canada.”

The Bank of Canada could also choose to purchase and issue more 30-year bonds, Chisani suggested, which could help the medium and long-term yields that have not been as affected by interest rate hikes so far.

He stressed that even with these other choices, wrestling with inflation is a tough job.

“It is a difficult task. It's not as straightforward as it sounds,” he said in a telephone interview.

Communication with the public, and thus influencing people’s expectations and economic behaviour, is another area in which the Bank of Canada can attack inflation, Zhao-Murray said.

Zhao-Murray noted that the central bank is trying to communicate that interest rates may remain elevated for some time, but it is fighting with expectations it set in past years when it said the exact opposite, and economic activity heated up in response.


The federal government also has tools at its disposal to fight inflation.

One option is to cut back on spending, and one Zhao-Murray highlighted as one of the most efficient methods. Observers have argued that federal government’s spending approach is at odds with the Bank of Canada’s tightening goals. Zhao-Murray said the government could aid the central bank by tightening its purse strings.

Another way could be to raise taxes on specific sectors or industries, the experts said.

Chisani said a “luxury tax” approach could influence consumers to reconsider some purchases, “and that alone would have a direct impact on the supply chain, inflation.” Such an approach should be selectively applied to certain sectors and higher income brackets so as not to be “punitive” on the economy, he added.

Zhao-Murray also pointed to taxes as a policy option, though he noted that governments are generally wary of this approach because it is politically unpopular with voters.

“That's why governments tend to focus on the spending side, because people will get very upset if you start changing the taxes on them,” he said.

Canada’s overheated housing market is another area where Zhao-Murray said the government could step in to aid the battle with inflation – but only if its interventions are targeted at supply. 

The limited supply of housing has been pinpointed as a major cause of soaring home prices in Canada. If the government made efforts to boost the supply of homes, that could help reduce inflation, he said.

He cautioned, however that without addressing the supply side, government programs such as the First Home Savings Account that are aimed at helping people get into the country’s pricey real estate market could have the opposite of their intended effect and contribute to keeping prices elevated.

Price caps on certain items are another possible government tool, but the experts argued that it should be used as a last report, if at all.

Zhao-Murray said he would “caution against” this approach, but noted that it has been used before in Canada to limited success. Pierre Trudeau’s government introduced temporary wage and price caps in some areas in the 1970s in a bid to combat inflation – a move that prompted debate and court decisions about government powers.

Chisani said price caps would not be his first choice either, as this could interfere with supply and demand and have unintended consequences on the marketplace.

He said price caps could be considered if inflation were to reach much higher levels like 15 or 20 per cent, and particularly affecting essential goods like food or energy.

“I don't think we're there just yet,” he said. “That would be probably the last resort, in my mind.”