Bank of Canada Governor Tiff Macklem said the central bank is ready to adjust its monetary policy if inflation comes in persistently above the bank’s forecast – although he reiterated that the latest spike in inflation will likely be temporary.
Statistics Canada reported Wednesday 3.4-per-cent inflation in April, the highest year-over-year jump in the Consumer Price Index in nearly a decade.
The increase was driven largely by rebounding gasoline prices being compared with low prices early in the pandemic. But there was also a broad-based rise in consumer prices on a month-to-month basis, adding to concerns that higher inflation could become entrenched as the economy reopens.
“There is a risk that this run-up in inflation proves to be more persistent than we’ve expected. At the same time, I would underline there’s also some downside risks on our projection,” Mr. Macklem said at a press conference on Thursday for the release of the bank’s annual Financial System Review.
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The central bank’s most recent forecast in April showed inflation hitting 3 per cent in the coming months, before falling toward the 2-per-cent target later in the year. Mr. Macklem said the latest Statscan inflation data is “broadly in line” with this projection.
“If there is a material [change], and we view this as a real step up in our whole inflation forecast, that is something that we would definitely take into consideration in our monetary policy decisions. We certainly have the tools and we have the commitment to achieve our inflation mandate,” Mr. Macklem said.
The Bank of Canada has been the most aggressive major central bank when it comes to withdrawing monetary policy stimulus to account for stronger-than-expected economic growth in recent months. Last month, the bank cut the size of its quantitative easing program by a quarter and pulled forward the timing for a potential interest rate hike to the second half of 2022 from 2023.
At the same time, Mr. Macklem has maintained that the economic recovery has a long way to go, and that persistently high unemployment will put downward pressure on inflation for some time.
Mr. Macklem acknowledged that consumer prices will likely be choppy in the coming months, and there are several factors that could drive prices up.
“We’ve already seen some supply-chain problems, we could see more supply-chain problems. Some parts of the labour market are very weak, but other parts of the labour market are actually quite strong; so you could get a very differentiated labour market with some wage pressures in parts of the labour market,” he said.
At the same time, he noted that there are downside risks to the bank’s growth and inflation forecasts, including the high Canadian dollar.
“The Canadian dollar is now two or three cents above where it was when we put out our projection ... If the Canadian dollar gets stronger, that will weigh particularly on our exporters,” he said.
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Mark Rendell