The head of the Bank of Canada says it is unclear how fast inflation will fall.


Ottawa-Bank of Canada Governor Tiff McClem said Wednesday that due to the unique nature of the COVID-19 pandemic, it is uncertain how quickly inflation will return to the central bank’s comfort zone.

McClem also spoke with the Senate Banking Commission, reiterating the need to raise interest rates to deal with inflation. Inflation is currently 4.8%, more than double the central bank’s 2% target and well above the 1-3% control range.

“Because we have never experienced such a pandemic before, there is uncertainty about how fast inflation will fall,” he said.

McClem said the central bank expects inflation to reach about 5% in the coming months.

“As the pandemic recedes and things normalize, we expect inflation to remain unpleasantly high in the first half of this year and fall fairly rapidly in the second half,” he added.

He said supply chains take time to handle bottlenecks and backlogs, and that there is “obvious uncertainty” in timing. Conversely, price spikes have reversed and inflation could fall more rapidly, he said.

McClem also reiterated that the Canadian economy no longer needed help to deal with the effects of the pandemic, and interest rates were on the rise soon.

“It will be a series of increases, not a single increase,” he added, adding that banks will carefully watch how those movements affect inflation and other aspects of the economy.

Last week, the Bank of Canada left the benchmark interest rate unchanged at 0.25%. Money markets are expected to rise for the first time on March 2, with a total of at least five rises this year.

By Julie Gordon and David Ljunggren

Reuters

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