Bank of Canada governor warns geopolitical trends could make inflation fight harder

Geopolitical trends could make the fight against inflation harder, Bank of Canada Governor Tiff Macklem said during a year-end speech Monday where he warned that getting price increases under control would not be easy.

Russia’s invasion of Ukraine was one of three main surprises to the Bank of Canada this year that helped push up inflation well past what it was expecting, said Macklem.

The attack has also underscored the vulnerability of the world to interconnected trade, while a response towards more protectionism and narrower trade could keep pressure on prices.

“Over the long term, it seems likely that we won’t have the same disinflationary forces that we’ve had for the past 30 years,” said Macklem.

“These potential developments could make it harder to bring inflation back to the 2% target and keep it there. But how much harder is very difficult to say.”

He said the bank was also surprised this year by how the combination of large supply chain shocks and an overheated economy would play out on inflation.

“The lesson from 2022 is that even if long-term inflation expectations are well anchored, when the economy is in excess demand, businesses raise their prices more quickly and by more when their costs increase.”

The bank has learned lessons from the year, including that restoring supply is harder than restoring demand; that averages can obscure inflationary pressure; and that supply disruptions are more inflationary when the economy is overheated, he said.

Macklem’s comments come after the Bank of Canada hiked its key interest rate by half a percentage point last week, bringing it to 4.25%  — the highest it’s been since January 2008.

He reiterated the message given last week, that rate hikes will be dependent on what the data shows, rather than being taken as a given.

“Decisions to raise the rate or to pause and assess the impact of past rate increases will depend on incoming data and our judgments about the outlook for inflation,” said Macklem.

Since March, the Bank of Canada has hiked its key interest rate seven consecutive times in an effort to bring inflation down and slow the economy.

After peaking at 8.1% in July, Canada’s annual inflation rate slowed to 6.9% in October — still well above the Bank of Canada’s target rate of 2%.

The Canadian Press

The Canadian Press is a national news agency headquartered in Toronto and founded in 1917.