By Julie Gordon and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada is concerned the factors fueling price increases, such as supply disruptions and related cost pressures, could last longer than expected, leading to more persistent inflation, an official said on Thursday.
Deputy Governor Toni Gravelle told a business audience there was much to be hopeful for as the recovery from the coronavirus pandemic picked up pace. But he said with inflation running “considerably above” the central bank’s 1%-3% control range, the risk it would stay above target was of greater concern.
“If supply disruptions and related cost pressures persist for longer than expected and strong goods demand continues, this would increase the likelihood of inflation remaining above our control range,” he said in a speech delivered via video link from Ottawa.
“This could feed into inflation expectations and contribute to wage pressures, leading to a second round of price increases,” he said. Canada’s headline inflation in October hit an 18-year-high at 4.7%.
The remarks highlight the Canadian central bank’s continued unease with hot inflation, which is proving less transitory than expected. Federal Reserve Chair Jerome Powell last month said the word “transitory” was no longer the most accurate term for describing the current inflation dynamic in the United States.
Gravelle reiterated that the Bank of Canada expected inflation to remain high into 2022, easing back to its 2% target in the second half of the year.
The central bank on Wednesday held its key rate at 0.25% and repeated guidance that a first hike could come as soon as April.
Gravelle said the Bank of Canada expects supply disruptions to unwind over time as bottlenecks are resolved. But he noted the risk of persistent disruptions figured prominently in the decision to hold borrowing costs at record-low levels.
In October, the central bank forecast supply disruptions would peak toward the of this year, then dissipate in 2022.
The Canadian dollar was trading 0.3% lower at 1.2695 to the greenback, or 78.77 U.S. cents, as oil prices fell and worries about the spread of the Omicron COVID-19 variant weighed on investors.
(Additional reporting by Fergal Smith in Toronto; Editing by Paul Simao)
