How the Bank of Canada Is Tackling Inflation as Trade Frictions Grow
Governor Tiff Macklem says the Bank of Canada may find it harder to keep inflation on target as global trade continues to be disrupted. The task is a balancing act: bring price growth to heel without choking off the economy. That balance, he said, is getting trickier as supply lines and trading relationships shift.
Where Inflation Stands Now in Canada
Inflation has eased this year. Interest rates had previously climbed to a peak of 5%—the highest in twenty years—but the Bank delivered three consecutive cuts starting in June. By July, inflation had fallen to 2.5%, a 40-month low. The trend is encouraging, though not guaranteed to continue on its own.
When Globalization Slows, Costs Can Rise
Macklem noted that a slowdown in globalization can push up the cost of globally traded goods and commodities. That can feed through to higher prices at home. With more uncertainty about where inputs come from—and at what price—the Bank needs to keep a closer watch on inflation’s drivers and react quickly when needed.
What Trade Disruptions Do to Prices
Speaking to the Canada-UK Chamber of Commerce, Macklem underscored how trade disruptions increase the volatility of inflation. Shocks can push inflation away from the Bank’s 2% target for stretches of time. Managing those swings, he said, calls for a proactive central bank that looks ahead rather than reacts late.
Risk Management and a Deeper Look at Supply Chains
The Bank of Canada is leaning on risk management to navigate the trade-off between price stability and growth. Part of that effort is a deeper investment in understanding global supply chains—how goods move, where bottlenecks form, and how quickly they clear. That knowledge helps the Bank judge whether price pressures are temporary or persistent, a distinction that matters for setting policy.
Canada’s Exposure—and How to Prepare
Canada’s economy is deeply tied to trade, which makes it more exposed when global markets seize up. Macklem pointed to pandemic-era supply shocks as an example of how hard it can be for central banks to support growth while keeping inflation steady. In such periods, forecasts can drift, so the Bank continues to refine its models and stress-test assumptions.
Preparing for a More Unsettled Trading World
Macklem argued that Canada should plan for more frequent trade interruptions as the global landscape evolves. The priority, he said, remains clear: keep inflation low, stable, and predictable even as conditions change. While the Bank of Canada doesn’t set trade policy, it needs to stay informed about international shifts and what they mean for Canadian consumers and businesses.
Recent Moves on Interest Rates
In June, the Bank of Canada became the first G7 central bank to lower borrowing costs, with inflation still within the Bank’s 1–3% control range. To date, the policy rate has been cut by 75 basis points to 4.25%, a step aimed at supporting economic stability while anchoring inflation expectations.
Frequently Asked Questions
What inflation rate does the Bank of Canada aim for?
The Bank targets 2% inflation, the midpoint of its 1–3% control range, to keep prices predictable for households and businesses.
How have recent rate cuts affected inflation?
After policy rates peaked at 5%, three cuts beginning in June coincided with inflation easing to 2.5% in July, a 40-month low.
How do global trade disruptions influence inflation?
Disruptions can raise costs and make inflation more volatile, pushing it away from the 2% target and complicating policy decisions.
Why is the Bank studying supply chains more closely?
A clearer view of supply chains helps the Bank judge whether price pressures will fade or persist, improving forecasts and responses.
What’s the role of risk management in the Bank’s strategy?
Risk management helps the Bank balance two goals at once: restraining inflation while supporting growth in a less predictable world.
