Bank of Canada warns of prolonged supply chain disruptions fueling higher inflation rates

The Bank of Canada is concerned that global supply chain disruptions will continue to drive inflation higher than expected, according to a top official. Deputy Governor Toni Gravelle emphasized the uncertainty surrounding the duration of these disruptions and their impact on the economy’s ability to grow without fueling inflation.

Supply Chain Disruptions: A Persistent Problem

Gravelle noted that assessing how quickly supply issues will peak is difficult due to various factors contributing to the problem, including increased spending on goods, severe weather, and pandemic-era consumption patterns. Businesses have been stockpiling inputs to meet the surge in demand, exacerbating the issue.

Inflation Expectations: A Growing Concern

The persistence of supply chain disruptions has become a major concern for the Bank of Canada. Inflation has been above its 2% target for seven months, and Gravelle warned that if supply disruptions and related cost pressures persist longer than expected, it could lead to inflation remaining above the control range.

Raising Interest Rates: A Possibility

The comments from Gravelle are likely to reinforce expectations that the Bank of Canada is considering raising interest rates soon. The central bank has pledged not to raise rates before the economy is fully recovered and has absorbed all remaining slack. However, with inflation surging above target, markets are anticipating rate increases as early as January.

Market Anticipation: Five Rate Hikes Expected

Markets are expecting the Bank of Canada to raise interest rates five times next year, which could have significant implications for borrowers and savers. The central bank’s next decision is on January 26, accompanied by a full set of quarterly forecasts.

Cloudy Outlook: Weather and Supply Chain Disruptions

Gravelle highlighted the difficulties in predicting when supply issues will peak, citing severe weather events such as droughts and flooding as major contributors to the problem. The Omicron variant has also exacerbated upward price pressures, potentially leading to a second round of price increases.

Impact on Wage Pressures: A Second-Round Effect

Gravelle warned that if supply disruptions persist longer than expected, it could lead to wage pressures and contribute to a second-round effect, where inflation expectations feed into higher wages and prices. This would be a significant concern for the Bank of Canada, which is committed to keeping inflation within its control range.

Conclusion

The comments from Gravelle have highlighted the uncertainty surrounding supply chain disruptions and their impact on inflation. The persistence of these issues has become a major concern for the Bank of Canada, which may consider raising interest rates soon to combat rising inflation. The market anticipation of five rate hikes next year could have significant implications for borrowers and savers.

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