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The Bank of Canada warns that inflation will stay higher longer than expected and has signaled that an interest rate hike could come sooner than expected.

The central bank said on Wednesday it now expects annual inflation rates to continue their upward trend for the remainder of the year, to 4.75% on average, and 3.4% next year. , up from its previous forecast of 2.4%, before returning to its target of 2% by 2023.

The rise in prices is due to global forces that have scolded supply chains, pushed up costs for businesses and limited the supply of goods in demand. The bank expects the worst supply problem to happen at the end of the year.

Added to the pressures are higher prices for gasoline and natural gas, as well as a rebound in the prices of some in-person services such as hotels and airline tickets.

Bank of Canada Governor Tiff Macklem said the higher prices are a challenge for Canadians, making it harder to cover their bills.

“I want to assure you that inflation is not going to stay as high as it is today, although it will take a little longer to come down,” he said.

“The Bank of Canada is committed to ensuring that the price increases we are experiencing today do not turn into continued inflation. … As these forces develop, it is our job to bring inflation back on target, and I can assure you that we will do that. “

The bank said the economy has rebounded enough for it to end its government bond buying program to encourage lower interest rates, but the recovery is far from over. which is why it has kept its key rate at 0.25%.

The bond purchases will be canceled to the point where the bank effectively stops stimulating the economy and instead maintains what is already there.

Macklem said the new pace of bond purchases would depend on the strength of the recovery and the trajectory of inflation, adding that it was “reasonable to expect” bond purchases to hold up. at least until the bank raises its key rate.

In its outlook on Wednesday, the bank suggests that interest rate hikes could start earlier than expected, as early as the second quarter of 2022, “although the highly unusual challenges of reopening an economy make that timeline more uncertain than it is. ‘habit”.

TD Bank Senior Economist Sri Thanabalasingam predicts the Bank of Canada will hike rates three times next year, raising its policy rate to one percent by the end of 2022.

“Inflation is rising and it would be prudent to remove some monetary stimulus as the economy continues to recover,” Thanabalasingam wrote in a note.

“That being said, we have to recognize that there is currently significant uncertainty around the economic outlook. A resurgence of the pandemic could lead to more stimulus, but if there is a faster than expected acceleration in household spending,” the bank could raise rates at a faster clip. “

In its monetary policy report, the Bank of Canada reduced its forecast for the growth of the Canadian economy this year to 5.1% from its previous forecast of 6.0%. Growth for next year is now expected to reach 4.3 percent, down from the previous forecast of 4.6 percent.

The central bank has warned that economic growth could slow in the event of a resurgence of COVID-19 cases, with the bank saying vaccine immunity could decline faster than expected.

On the other hand, households may decide to start spending more of their savings earlier if they feel more comfortable with high immunization rates, which would increase demand and worsen inflationary pressures. .

Likewise, the outlook warns that the temporary factors driving inflation could become even more persistent and lead to wage growth that itself fuels an inflationary spiral.

Although the country recovered the three million jobs lost at the height of the COVID-19 crisis last year, unemployment remains above pre-pandemic levels and some employers are struggling to hire workers.

The bank said labor shortages could persist as more unemployed Canadians seek to upgrade and leave industries like restaurants and bars that need workers.

Salary growth so far remains at or below pre-pandemic levels, but the bank is monitoring whether that changes as companies try to attract talent.

This report by The Canadian Press was first published on October 27, 2021.

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