Inflation will fade into background as it settles at 2 per cent, Bank of Canada says

The Bank of Canada on Tuesday said inflation, which has been the center of attention and unhappiness for years amid rising prices, should fade into the background again as the annual rate settled back at 2 per cent.

 

That should allow consumers and businesses to spend and invest with confidence after years of difficulties, deputy governor Rhys Mendes said in a speech in Charlottetown, Prince Edward Island.

 

His comments were prepared before U.S. President-elect Donald Trump announced on Monday that he would impose a unilateral 25 per cent tariff on all goods from Canada and Mexico from Jan. 20.

 

If Trump carries out his threat, economists say it could fuel inflation, suppress growth and distort the trajectory of interest rates in Canada.

 

The BoC has reduced its key rate four times in a row since June and inflation – which spiked at 8.1 per cent in June 2022 – has consistently stayed within the 1 per cent to 3 per cent target range this year.

 

“The past few years were unlike anything we’d experienced before, and none of it was easy. But we believe inflation will once again fade into the background as it settles back at 2 per cent,” Mendes said.

 

“This will allow Canadian consumers and businesses to spend and invest with confidence.”

The BoC cut rates in October by a super-sized 50 basis points to 3.75 per cent and Mendes reiterated that further reductions were likely if the economy developed as forecast.

 

“We no longer need interest rates to be as restrictive as they were. This is why we took a bigger step at our last decision,” he said.

 

Inflation in October ticked back to up to 2 per cent from 1.6 per cent in September and currency markets see a less than one in five chance of another 50 basis point rate on Dec. 11.

 

Mendes said the bank would not want to see inflation falling below the 2 per cent mark and poured cold water on the idea of measures to reverse the price increases of recent years, given they would lower inflation expectations, hurt demand, prompt lay offs and depress wages.

 

“Escaping a deflationary cycle of this nature can be extremely difficult,” he said.

 

 

 

 

This article was first reported by Reuters