(Bloomberg) -- Bank of Canada Governor Tiff Macklem said shifting trends in global trade are likely to create more supply shocks in the future, potentially driving up prices and adding volatility to inflation.
Global trade is being “rewired” as China moves away from being the lowest-cost supplier of consumer goods, Macklem said in a speech to the Canada-UK Chamber of Commerce in London on Tuesday. That’s pushed production elsewhere, complicating traditional supply chains.
“Trade disruptions may mean larger deviations of inflation from the 2% target,” Macklem said, adding that supply shocks present a particular problem for monetary policy, which “can’t stabilize growth and inflation at the same time.”
Macklem said Canada needs to position itself as a stable and reliable alternative as trade policy is recast to encompass national and economic security, and trade flows are being redirected by import and export restrictions, tariffs and conflicts.
The comments reinforce the bank’s views that interest rates are unlikely to return to pre-pandemic lows.
In the speech, Macklem didn’t comment on the near-term path for monetary policy or the central bank’s decision to cut interest rates for a third consecutive meeting last week. But speaking to reporters afterward, he reiterated the bank isn’t on a predetermined path and will take decisions one at a time.
He left the door open to changing the pace of easing — either by slowing the pace of rate cuts or delivering a larger than quarter-percentage point reduction — depending on incoming data.
If the economy and inflation are weaker than officials expect, “it could be appropriate to take a bigger step,” Macklem repeated. At the same time, “it could be appropriate to slow the pace of interest rate declines” if upside risks, including a stronger than expected housing market or persistent wage growth, lead to stickier inflation, he said.
He also said the latest Canadian jobs data continued a pattern seen in recent months: businesses are hiring, but not enough to match labor force growth. This dynamic drove the unemployment rate up 0.2 percentage points to 6.6% in August despite a net gain of 21,000 jobs.
Macklem said he hasn’t seen a “big change” in layoffs at this point, but rising job losses would “certainly be a concern.” He reiterated that the Bank of Canada is cutting rates because it wants to see growth in the economy and jobs pick up as inflation gets closer to the 2% target.
“We want to see companies hiring,” he said, but noted there will likely be a lag. “You’re probably going to see some further adjustment in the labor market.”
Macklem’s speech on trade comes on the heels of the Canadian government’s decision to impose tariffs on Chinese-made electric vehicles, aluminum and steel, following in the footsteps of the US and EU. Macklem said trade restrictions and industrial policy have increased around the world since around 2018, however.
“Security risks are real and need to be addressed, but it is important they not become a pretext for inefficient protectionism,” he said.
On Tuesday, Prime Minister Justin Trudeau’s government also started a 30-day consultation on potential new tariffs on Chinese products including batteries and battery parts, semiconductors, solar products and critical minerals.
The countries that produce manufactured goods are changing, the governor said, and geopolitical tensions are causing frictions while public support for globalization is waning. Canada’s export growth is slowing despite advanced countries consuming more, but service exports from Canada are rising.
“Canada’s trade partners are looking for new suppliers to replace goods from China and other regions,” he said. He urged Canada to invest in infrastructure and reduce interprovincial trade barriers to make integrating the country into the North American value chain more attractive for business.
--With assistance from Irina Anghel.
(Adds comments during news conference starting in paragraph six.)
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