As the Bank of Canada hints that interest rates may stay at five per cent for some time, a former deputy governor at the central bank says the country’s economy now risks "stagflation."

On Wednesday, the Bank of Canada held interest rates at five per cent. It kept the door open to further hikes in the future, while reiterating that “supply and demand in the economy are now approaching balance.”

Paul Beaudry, deputy governor at the Bank of Canada from 2019 until July of this year, said Canada should be concerned about stagflation, which occurs when an economy faces slow growth, high unemployment and high prices.

“I think we're in that risk right now,” he said.

“Growth is very slow right now. If you look at it per capita, it's actually declining. The actual growth of the economy per capita is already negative and we still have inflation well above the Bank of Canada's target. That’s, in some sense, a sign of that stagflation.”

Beaudry said the hope is that an economic slowdown will be enough to bring prices back down, but stagflation remains a risk.

“If … inflation doesn't come back down because the economy has gotten used to an inflation rate more around three and a half, or four per cent, then that's going to be a real difficulty and a real challenge going forward,” Beaudry said.

The Bank of Canada downgraded its growth outlook the 2023 and 2024 in its Monetary Policy Report on Wednesday, with growth expected to reach 1.2 per cent and 0.9 per cent in those respective years.

Beaudry said mortgage renewals, which could see some homeowners suddenly paying thousands of dollars more when it comes time to renew, will have a significant impact on growth in Canada.

“More and more people start renewing and are renewing that rates that are much higher than when they first took out that mortgage,” he said.

“That’s … a long shadow on the Canadian economy. The Bank of Canada has taken that into account.”


Beaudry also warned against high hopes of a rate cut in the near future.

“Whatever the interpretation you take from yesterday's decision, interest rates are not coming down for a while,” he said, pointing to the Bank of Canada’s forecasts for inflation staying above 3.5 per cent into next year and starting to come down in 2025.

“That's not an environment where it's suggesting the Bank of Canada is thinking about rate cuts at this point.”