TORONTO (CU)_Over much of spring and summer central bankers of Canada were arguing that the current record high inflation rate, driven by supply-chain bottlenecks and statistical quirks, was a short-term phenomenon. However, rising energy prices and the continued supply chain crisis have forced over the recent months central bank governor Tiff Macklem and his team to change their narrative. In late October, the inflation projections issued by the Bank of Canada expected the annual rate of inflation to climb close to 5 per cent for the remainder of 2021, before dropping to around 2 per cent by the end of 2022. However, now the apex bank is considering the possibility of this rate to average 3.4 per cent for the whole of next year.
Meanwhile, the BoC also appeared to alter its timeline for tightening monetary policy, with its latest Monetary Policy Report revealing brining forward the timeline for the first post-pandemic interest rate hike to the “middle quarters of 2022”, a shift from its previous language suggesting the second half of next year.
The Canadian dollar and yields soared in response to these adjustments, which, according to some economists, signals that tightening monetary policy could lead to the expected results. “[…] going forward, if we come anywhere close to the kind of growth numbers we’re expecting and inflation, then this kind of tightened financial conditions will be occurring for the right reasons,” Derek Holt, Scotiabank’s head of capital markets economics, told BNN Bloomberg.
However, there are other economists who disagree, insisting that interest rate hikes are not the cure to high inflation experienced by the Canadian economy.
“The type of inflation that central banks can monitor is that stickier longer-term inflation driven by higher wages and shelter costs. That’s the type of inflation they can focus on,” Frances Donald, chief economist at Manulife Investment Management, noted.
But she is of the view that the high rate of inflation impacting Canadians is different, as it is caused by several global issues like tariffs, port closures in China and droughts in Brazil. “My concern is that if we do see a Bank of Canada that’s raising rates as aggressively as the markets are saying, that’s actually going to do very little to help our inflation problem and actually dampen growth further.”
Accordingly, Donald said she hopes the central bank would follow the approach taken by its counterparts in the US and the EU, who say that current price pressures are transitory and they are likely to abate sometime around early-2022 without interference from monetary policymakers.
