Dec 9, 2021
Bank of Canada worries supply chain disruptions could persist
Despite record beef production, demand continues to outpace production capacity: Senior analyst
The Bank of Canada is worried that global supply chain disruptions stoking inflation could last longer than expected, according to a top official.
In a speech a day after policy makers left interest rates unchanged, Deputy Governor Toni Gravelle said Thursday the duration of supply disruptions “figured prominently’ in deliberations ahead of the decision.
While reiterating that officials expect these constraints to eventually ease along with inflation next year, Gravelle emphasized there’s a lot of uncertainty around that outlook. In January, the central bank will reassess whether bottlenecks and shortages are impacting the economy’s ability to grow without fueling inflation.
The comments are likely to reinforce expectations the Bank of Canada is considering raising interest rates soon, given inflation has surged well above its 2 per cent target. They also suggest it could scale back further -- as early as next month -- its estimate of the nation’s productive capacity. A similar forecasting adjustment in October allowed the central bank to accelerate the the potential timing of rate increases.
“Our current view remains that we should see elevated inflation subside in the second half of next year,” Gravelle said in prepared remarks for a speech aimed at providing more insight into Wednesday’s decision. “However, we will conduct a full assessment of this risk in January when we update our projection for the economy and inflation.”
The Bank of Canada has pledged not to raise interest rates before the economy is fully recovered and has absorbed all remaining slack. In October’s economic projections, it forecast this would not happen before April. Markets are anticipating the central bank will raise interest rates five times next year.
The bank’s next decision is on Jan. 26, which will be accompanied by a full set of quarterly forecasts. On Wednesday, officials led by Governor Tiff Macklem decided to leave the benchmark interest rate and forward guidance unchanged. But they also highlighted strength in the labor-market recovery, as well as worries around the persistence of high inflation.
Gravelle said assessing how quickly supply issues will peak is difficult, given there are a variety of factors contributing to the problem from increased spending on goods to severe weather. These supply issues were fueled by pandemic-era consumption patterns as consumers bought more goods since many services weren’t available.
Additionally, businesses were bulking up on their inputs to meet the increased demand, exacerbating the problem. Extreme weather hasn’t helped, with droughts in the summer impacting crop harvests and more recently the flooding in B.C devastating businesses and homes.
But supply chain disruptions “continue to be an important upside risk to our inflation forecast.” These upside risks, meanwhile, are a “greater concern” because inflation has been above the central bank’s 1 per cent to 3 per cent control range for seven months.
“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,” Gravelle said. “This could feed into inflation expectations and contribute to wage pressures, leading to a second round of price increases.”
The omicron variant, while potentially hurting oil prices in the short-term, has the potential to exacerbate upward price pressures in the future by re-aggravating supply constraints.