Bank of Canada Warns Trade Disruptions May Impede Inflation Control, According to Reuters

By Promit Mukherjee and David Ljunggren

OTTAWA – Global trade disruptions may pose challenges for the Bank of Canada in consistently achieving its 2% inflation target. Governor Tiff Macklem addressed these concerns on Tuesday, emphasizing the need to balance the risks of rising prices with the necessity for economic growth.

Inflation rates have decreased this year, aided by interest rates that remained at a two-decade high of 5% for over a year before being cut three consecutive times starting in June. Macklem noted that with the slowdown of globalization, the prices of global goods may not decrease as significantly, potentially leading to increased inflationary pressures.

He highlighted that trade disruptions could also contribute to greater variability in inflation rates, pointing out the impact that supply shocks can have on prices. Global trade is currently facing challenges, particularly as many advanced economies shift towards exporting services rather than goods and as geopolitical tensions, largely influenced by China’s trade strategies, lead to shifts in supply chains.

Macklem warned that these trade disruptions might result in inflation deviating more widely from the established 2% target. As such, the central bank is prioritizing risk management to navigate the dual objectives of controlling inflation while supporting economic growth. They are also investing in better understanding global supply chains.

In July, overall inflation in Canada fell to a 40-month low of 2.5%. Given Canada’s status as a small, open economy heavily reliant on trade, it is particularly susceptible to disruptions. Macklem remarked that supply shocks, similar to those experienced during the pandemic, present a complex challenge for central banks, as they cannot stabilize both growth and inflation simultaneously.

To adapt to this evolving economic landscape, Macklem stated that the Bank of Canada is updating its models to account for scenarios where periods of uncertainty make typical forecasts less dependable. The bank is increasingly utilizing more granular data to analyze and comprehend the implications of trade and industrial policy.

Macklem asserted that it is crucial for the Bank of Canada to maintain low, stable, and predictable inflation, even amidst significant changes in global trade patterns. Recently, the Canadian government imposed a 100% import duty on Chinese-made electric vehicles and initiated discussions about possibly applying a surtax on various Chinese products, including critical minerals, batteries, solar products, and semiconductors.

He acknowledged that while Canada may not be the cheapest option for manufacturing and trade, the country boasts a highly skilled labor force, reliable energy and transportation infrastructure, and robust financial institutions—attributes that can serve as competitive advantages.