By Fergal Smith
TORONTO (Reuters) – Bank of Canada Governor Tiff Macklem said on Thursday supply pressures are showing no signs of easing and the central bank will be watching the impact of higher interest rates on inflation to gauge how much it needs to tighten policy.
Disruptions to supply chains have raised price pressures globally, with data on Wednesday showing that Canada’s inflation rate accelerated to a 31-year high of 6.7% in March.
“These supply disruptions, there is really no sign that they are easing,” Macklem told reporters in a virtual news conference held after he attended G20/IMF meetings in Washington.
“We know that not only is the war further disrupting already fragile supply chains. COVID lockdowns in China are creating a new level of uncertainty.”
The BoC last week raised its benchmark rate by half a percentage point, its biggest single hike in more than two decades, and opened the door to lifting interest rates above a neutral setting, which it estimates at between 2% and 3%, for the first time in 14 years. Its next policy decision is due on June 1.
When deciding how high to raise interest rates, the central bank will be looking at the impact its tightening has on household spending and inflation, using annualized quarter-over-quarter inflation rates as an early signpost.
“If we start to see demand pressures internally start to moderate and we start to see those international price pressures abating, you should see those quarter-over-quarter inflation rates start to come down.”
The central bank last week projected that annualized quarter-over-quarter inflation will fall from around 6% in the second quarter to about 2.5% in the fourth quarter.
(Reporting by Fergal Smith; Editing by Sandra Maler)
