The 2022-23 rate-hike cycle to tame post-pandemic inflation

Starting in March 2022, the Bank of Canada raised its policy interest rate from 0.25% in a series of unusually large and rapid increases to 4.5% within roughly a year, and ultimately to 5% by mid-2023, the fastest tightening cycle in the Bank's modern history, as it confronted inflation that had climbed well above its 2% target amid pandemic-related supply disruptions and strong post-reopening demand. Governor Tiff Macklem argued in a February 2023 address titled 'Higher interest rates are working' that the rapid increases were already cooling inflationary pressure, framing the costs of tighter policy, including slower housing activity and higher borrowing costs for households, as necessary trade-offs against the larger damage of letting inflation become entrenched. By September 2023, however, Macklem struck a more cautious tone, telling business leaders that progress in the inflation fight appeared to have stalled and explicitly invoking the lesson of the 1970s that fighting inflation half-heartedly would be a far costlier mistake than maintaining restrictive policy for longer. The episode marked a sharp reversal from more than a decade of historically low Canadian interest rates following the 2008 crisis and the 2015 oil shock.