Bank of Canada governor warns geopolitical trends could make inflation fight harder

Economic analyst reacts to latest rate decision Economic analyst DT Cochrane gives his opinion on the Bank of Canada's decision to hold the key interest rate at 4.5%.

VANCOUVER — Bank of Canada Governor Tiff Macklem says the bank was surprised this year how the combination of large supply chain shocks and an overheated economy would play out on inflation.

He says Russia's invasion of Ukraine was also a surprise, which led to higher energy prices and helped turbocharge already rising inflation.

Macklem says the unexpected geopolitical action points to the longer-term challenge of keeping inflation low as protectionism increases, and the deflationary benefits of global economies opening up fade.

He says the bank has learned lessons from the year, including that restoring supply is harder than restoring demand, that averages can obscure inflationary pressure and that supply disruptions are more inflationary when the economy is overheated.

Macklem's comments come after the Bank of Canada hiked its key interest rate by half a percentage point last week, bringing it to 4.25 per cent -- the highest it's been since January 2008.

Since March, the Bank of Canada has hiked its key interest rate seven consecutive times in an effort to bring inflation down and slow the economy.

This report by The Canadian Press was first published Dec. 12, 2022.