Bank of Canada considers a recent inflation hike to be temporary

It looks like the central bank’s officials aren’t worried about the latest inflation hike, considering it to be the result of temporary factors.

According to Deputy Governor Tim Lane, the increase in Canadian inflation, exceeding 3%, was one of the main issues discussed by policy makers this week.

He says the Bank of Canada officials agreed the higher-than-expected inflation was mostly caused by unfavorable annual comparisons, and the on-going excess supply will put downward pressure on prices as soon as the base effect weakens.

“These base-year effects are temporary, they will not persist beyond the next few months,” – Lane says. “What will go on until a complete recovery is the underlying slack in the economy.”

“This slack will keep pushing inflation down, when these base-year effects fade,” – he added.

Lane’s speech is an attempt to destroy the concerns on faster inflation that could make Canadians and investors expect an accelerated exit from supportive monetary policy measures. In April, the annual inflation already reached 3.4%, and the BoC believes it will remain around 3% over next several months before slowing.

On Thursday, the U.S. released a report showing a larger-than-expected 5% in annual inflation in May. Their economists also suggest it’s the result of temporary supply pressures, following the pandemic.

The Bank of Canada kept its key lending rate at a historic low level and its current pace of bond purchases unchanged this week.

Lane repeated the Bank’s tone, saying the BoC is optimistic about the near-term outlook, even in spite of certain weak data in recent months caused by the lockdowns.

According to him, the national economy is on its way to recovery mostly as it was expected when the Bank released its quarterly forecasts in April.

Moreover, Lane admitted that there are still risks of cost pressures that the Bank will need to watch closely. They may include higher prices for raw materials, or supply issues.

During his recent virtual speech, Lane discussed how the pandemic is accelerating a digital transformation in Canada, letting people work and shop remotely. This change toward technology also affects the monetary policy, as it made the country more resilient to the lockdowns.

“I’m sure the recession caused by the pandemic will lead to lost capacity and scarring,” – Lane noted. “However, the accelerated digital transformation has supported resilience significantly, and now we think the damage to potential could be less than we have feared.”