Inflation to stay higher for longer, Bank of Canada warns

Inflation will remain at a higher level for a longer period than previously expected, the Bank of Canada said today.

The bank explained that inflation will keep rising from its current level, which Governor Tiff Macklem said was “about 4.5 per cent,” to closer to five per cent by the end of the year.

It will average 4.75 per cent, the central bank predicted, before coming down to 3.4 per cent in 2022 and eventually settling back to two per cent in 2023.

Macklem said higher inflation was being caused by supply disruptions and rising energy prices.

But he added: “We know higher prices are challenging for Canadians, making it harder for them to cover their bills.

“I want to assure you that inflation is not going to stay as high as it is today, even if it is going to take somewhat longer to come down.

“The Bank of Canada is committed to ensuring that price increases don’t become ongoing inflation.”

The bank also said it is keeping its key policy rate at 0.25 per cent, despite halting its quantitative easing program and “moving into the reinvestment phase.”

But interest rate increases could come sooner than previously anticipated, the bank explained.

It added: “The global economic recovery from the COVID-19 pandemic is progressing. Vaccines are proving highly effective against the virus, although their availability and distribution globally remain uneven and COVID variants pose risks to health and economic activity.

“In the face of strong global demand for goods, pandemic-related disruptions to production and transportation are constraining growth. Inflation rates have increased in many countries, boosted by these supply bottlenecks and by higher energy prices. While bond yields have risen in recent weeks, financial conditions remain accommodative and continue to support economic activity.”

The bank projected global GDP growth of 6.5 per cent this year, with Canada's GDP growing five per cent.

It said “robust economic growth has resumed” in Canada amid strong jobs gains in some sectors.

In 2022, growth of 4.5 per cent is forecast by the bank and in 2023, 3.75 per cent.