Near-term inflation higher amid Ukraine war: Bank of Canada

Deputy governor Sharon Kozicki says inflation could climb higher than the bank predicted back in January

The Russian invasion of Ukraine is adding to inflationary pressures around the world and in Canada, a senior Bank of Canada official said Friday.

In a speech by webcast to a conference at the U.S. Federal Reserve Bank of San Francisco, deputy governor Sharon Kozicki said inflation in the near term was expected to be higher than the central bank projected in January due to the surge in prices for oil and other commodities.

"A key concern for us is the broadening of price pressures—around two-thirds of the components in the consumer price index are now exhibiting inflation above 3%,'' Kozicki said in the prepared text of her speech.

"Persistently elevated inflation increases the risk that longer-run inflation expectations could drift upward."

The Bank of Canada's next interest rate announcement is set for April 13 when it will also update its quarterly economic forecast.

Kozicki said she expected the pace and size of the rate increases to come and the bank's plan to allow its holdings of Government of Canada bonds to shrink will be key parts of the central bank's deliberations.

The Bank of Canada raised its key interest rate target by a quarter of a percentage point to 0.5% earlier this month in a first move to help fight inflation. The central bank has said that higher rates will be needed as it works to bring inflation, which sits at a three-decade high, back under control.

In its monetary policy report in January, the Bank of Canada forecast an annual inflation rate of 5.1% in the first quarter of 2022 and an average of close to 5% in the first half of this year.

Statistics Canada reported earlier this month that the annual pace of inflation in February climbed to 5.7%, up from 5.1% in January.

In her speech, Kozicki said the pandemic has had an uneven impact on households with low-wage workers, especially women and young people, being the hardest hit. And now, those with low incomes are also being hit especially hard by inflation.

"With everyday items such as gas and groceries facing some of the fastest price gains, all households are affected by high inflation. But my colleagues and I are mindful that this is especially painful for those with low incomes, because they tend to spend a greater share of their earnings on such items," Kozicki said.

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