OTTAWA, March 2 - The Bank of Canada may need to raise interest rates at times when economic activity is subdued if supply-side disruptions are expected to have sizeable or persistent effects on inflation, Deputy Governor Sharon Kozicki said on Monday.
Speaking in Norway, Kozicki identified a set of structural shifts that could precipitate such supply shocks. She cited protectionist trade measures in the United States, strains in Canada’s trading relationship with its neighbor and developments in artificial intelligence as examples of changes that could alter supply conditions.
"Many people may find it surprising or couterintuitive that, at times, monetary policy needs to be tightened when the economy is weak. Yet that is exactly the difficult trade-off we sometimes face,"
In the same address she elaborated on the policy implications: "Generally, when a supply shock is expected to have large or persistent impacts on inflation, some degree of policy restraint will be needed to bring inflation back to target."
Kozicki was careful to note that the scenarios she outlined do not form part of the bank’s current monetary policy deliberations. She also did not reference the U.S. and Israeli attacks on Iran during her remarks.
The Bank of Canada is due to announce its next interest rate decision on March 18. The key policy rate stands at 2.25%, which the central bank says should keep inflation close to its 2% target provided the bank’s forecasts materialize.
Beyond the trade and technology shifts, Kozicki highlighted additional forces that have increased the frequency and scale of supply-side shocks. She pointed to rising geopolitical tensions, an aging population and more frequent extreme weather events as contributors to supply disruptions.
"Supply-side developments can lead to trade-offs for monetary policy. And sometimes, these developments can result in a combination of a weak economy and high inflation,"
She reiterated the distinction in policy response depending on the nature of a supply shock. When a shock is expected to have limited influence on inflation but to depress economic activity, Kozicki said the Bank of Canada would be less likely to tighten policy and might instead consider easing.
The remarks underline the central bank’s approach to weighing inflation persistence against growth weakness when supply disruptions alter the inflation outlook.
Contextual note: Kozicki’s comments framed how structural changes can reshape trade-offs facing monetary policymakers without asserting that these scenarios are the basis for the bank’s immediate decisions.