MNI INTERVIEW: BOC Inflation Patience Is Warranted- IMF Rep

Canada's central bank has some latitude to see if the jump in energy prices tied to the Iran war will be contained or spread to inflation more broadly, and in adverse scenarios there will also be further offsetting economic weakness to consider, a top IMF analyst tracking the country told MNI.

“What the Bank has signaled so far looks appropriate: not overreacting to the initial price shock, while staying alert to any signs of broader inflation persistence,” Ashvin Ahuja, IMF’s Mission Chief for Canada, said in an interview Friday. 

“In the near term, the key issue is whether this remains a relative-price shock or starts to affect broader inflation dynamics and expectations,” he said.

Governor Tiff Macklem said after IMF meetings ended that officials won't allow the rise in energy prices to turn into more stubborn inflation. Investors are betting the Bank will boost its 2.25% policy rate perhaps twice later this year. Most economists project no change because slack in the economy before the conflict erupted will hold prices down.

The IMF's Ahuja also pointed to some potential sources of weakness even though Canada's economy historically benefits from higher commodity prices. 

ONLY PARTIAL CUSHIONING

“Canada is somewhat better placed than many countries because it is a net energy exporter, but the overall effect could still be mixed,” he said. “Higher energy prices improve Canada’s terms of trade, but they also add to inflation and can squeeze households and non-energy firms.”

Finance Minister Francois-Philippe Champagne told MNI at the IMF his government has some windfall revenue from energy royalties, but some of it needs to be used to give relief to struggling households. (See: MNI INTERVIEW2: Oil Windfall Can Aid Affordability - Champagne)

The IMF and the Bank both see domestic GDP growth of less than 2% this year, with U.S. tariffs on autos and steel hurting production and causing firms to delay investment. Any prolonged conflict in the Middle East could also damage the global economy and in turn Canada's prospects, officials at both institutions said. 

“In more adverse scenarios, Canada’s energy-exporter status would provide only partial cushioning,” Ahuja said. “Weaker global demand, tighter financial conditions, and greater uncertainty could outweigh the benefit from higher energy prices.”