Bank of Canada governor Tiff Macklem says there is some uncertainty about how quickly three-decade-high inflation rates will come back down to the central bank’s comfort zone.
He says the reason has to do with the unique circumstances surrounding the pandemic and the global reopening of local economies.
The annual pace of inflation climbed in December to 4.8%, a pace that hadn’t been seen since September 1991.
Macklem told the Senate’s banking committee that the annual inflation rate could hover around 5% over the first half of 2022, noting the impact that will have on lower-income Canadians as prices rise for gas and food.
In his opening remarks to the committee, Macklem says conditions should normalize and inflation rates cool as the pandemic fades.
He says interest rates will have to rise to bring inflation back to the bank’s 2% target, noting the Bank of Canada is no longer promising to keep rates at rock-bottom levels.
The Bank of Canada held its key policy rate unchanged late last month at 0.25%, which is where the rate has been since the onset of the pandemic in March 2020.
Statistics Canada reported Tuesday that real gross domestic product in November rose just above the levels seen pre-pandemic in February 2020.
Macklem also noted in his opening remarks that employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up.
High inflation, the economy ending 2021 on solid footing, and the labour market above pre-pandemic levels all have economists believing the Bank of Canada will raise its trendsetting interest rate in March.
Macklem didn’t say when the path for rate hikes will begin, or how many hikes could come over the course of the year.