Bank of Canada head acknowledges inflation hotter than expected

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Bank of Canada governor Tiff Macklem acknowledged inflation ended the first quarter hotter than he expected, a concession that will feed speculation the central bank could accelerate its march to a more normal interest rate setting.

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“These supply disruptions, there’s really no sign that they are easing,” he said when asked about Statistics Canada’s March inflation reading, which showed the consumer price index surged 6.7 per cent from a year earlier, the biggest increase since 1991.

The central bank’s comfort zone for inflation is one per cent to three per cent.

“We’ll have another month’s data before we get to our next (interest-rate) decision (on June 1),” Macklem said. “But, yes, it did come in a bit higher than we were expecting.”

Forecasts ahead of the latest inflation numbers suggested the central bank and Bay Street were expecting something closer to six per cent. The miss emboldened critics who think the Bank of Canada is behind the curve, despite executing an unusually large half-point increase on the benchmark interest rate last week. Chatter that Macklem could be forced to get even more aggressive in the months ahead grew louder.

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A three-quarter-point increase is unlikely. The argument that inflation peaked in March is at least as strong as the one that insists the central bank has lost its grip on prices. That means a second half-point adjustment remains the best bet for the Bank of Canada’s next policy update. Still, reporters couldn’t resist asking if the central bank was prepared to go bigger.

“I’m not going to rule anything out,” said Macklem, which is typically what central bankers say when they are asked about future policy decisions. “We raised 50 basis points last week. That in itself is an unusual step.”

The Bank of Canada prefers quarter-point adjustments to reduce the risk of unintended consequences that would force it to backtrack. Macklem and his deputies are especially wary of shocking debt-burdened households that have grown used to low borrowing costs. The dampening effects of interest-rate increases will quite likely be magnified under such conditions.

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“We signalled that Canadians should expect further increases in interest rates,” he said. “I’ve used the wording that we need to normalize monetary policy reasonably quickly and we’re prepared to be as forceful as needed. I’m really going to let those words speak for themselves.”

A year ago, Macklem and other central bankers thought inflationary pressures were primarily the result of supply shortages. He reiterated that things have changed, and that strong demand has become an important factor.

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Statistics Canada reported on April 22 that retail sales increased 0.1 per cent in February from the previous month. A drop in automobile purchases offset strength elsewhere; sales increased 1.4 per cent with sellers of motor vehicles, automobile parts and gasoline removed from the calculation. It’s a strong number that followed an even stronger 3.3 per cent increase the previous month.

“This looks like a solid start to the year,” Shelly Kaushik, an economist at Bank of Montreal, said in a note to clients, while flagging that inflation could be influencing the numbers since volumes actually declined.

In a separate report, Statistics Canada said its index of industrial product prices jumped four per cent in March from February, the biggest month-over-month increase since it began collecting the data in 1956. The numbers support an observation Macklem made on the call that ripples from the war, and the West’s response to it, quickly influenced global prices of essentially everything.

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Macklem said the surprises in the March inflation numbers were primarily the result of ongoing supply constraints. He flagged increases in the prices of durable goods such as appliances, furniture and automobiles. Food prices are probably being affected by the war in Ukraine, a big exporter of wheat, and COVID-19 lockdowns in China are “creating a new level of uncertainty,” he added.

“Inflation is going to be higher for longer, or, to put it a little more positively, it is going to take longer to come down,” Macklem said. “That reflects the fact that the war has pushed up commodity prices. It also is further disrupting already disrupted supply chains. It’s disrupting trade. Disrupting shipping. Against that background, there is a need to be more forceful, and we took an important step last week.”

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