Bank of Canada warns against prolonged inflation, interest rate hike may be coming

The Bank of Canada is warning that inflation will stay higher for longer than it previously forecast and signalled that an interest rate hike may be coming sooner than expected.

The central bank said on Oct. 27 that it now forecasts that annual inflation rates will continue their upward swing through the rest of year, averaging 4.75 per cent, and be 3.4 per cent next year, up from its previous forecast of 2.4 per cent, before coming back to its two per cent target by 2023.

Driving the rise in prices are global forces that have snarled supply chains, pushed up costs for companies and limited the supply of in-demand goods. The bank expects the worst of supply problems will hit at the end of the year.

Adding to pressures are higher prices for gasoline and natural gas, and a rebound in prices for some in-person services like hotels and flight fares.

Bank of Canada governor Tiff Macklem said higher prices are challenging for Canadians, making it harder for them to cover their bills, but price gains should ease as temporary issues work themselves out.

And if not, he said the bank can and will act to keep inflation under control and bring it back to the central bank’s comfort zone.

“We understand what our job is. Our job is to make sure that the price increases we’ve seen in many globally traded goods don’t feed through and translate into ongoing inflation and we’re going to do our job,” he told reporters at a late-morning press conference.

“If there are new developments, we start to see that feed through, we will accelerate our actions to bring inflation back to target.”

The bank said the economy has rebounded far enough for it to end its government bond-purchasing program aimed at encouraging lower interest rates, but the recovery is far from complete, which why it kept its key policy rate on hold at 0.25 per cent.

The central bank warned that economic growth could slow if there is a resurgence of COVID-19 cases, with the bank pointing to evidence that vaccine immunity may wane quicker than previously anticipated.

Although the country has recovered the three million jobs lost during the depths of the COVID-19 downturn last year, unemployment remains above pre-pandemic levels among a range of indicators that Macklem said still need to improve.

At the same time, some employers are having a tough time hiring workers, which the bank said could persist as more out-of-work Canadians look to re-skill and leave industries like restaurants and bars that are in need of workers.

So far, wage growth remains at or below pre-pandemic levels, but Macklem said the bank is watching whether that changes as businesses try to attract talent and becomes a driver of inflation.