Risk of BoC overshoot on rates is reducing: CIBC

According to CIBC Capital Markets, the Bank of Canada is reducing the risk of overshooting its benchmark rate as supply chain issues ease.

Deputy Chief Economist Benjamin Tal said supply-side factors are easing as consumer prices rise, which should bode well for the central bank’s fight against rising prices.

“Changing the composition of inflation can serve to reduce the likelihood/magnitude of overshoots by the Bank of Canada and the Fed. Each basis point decline in the contribution of supply-driven inflation leaves more control to central bankers to reduce inflation as they become more responsive to policy,” Tal wrote.

Work by the San Francisco Fed suggests that inflation is likely to be driven equally by strong demand and supply pressures, the report said, and that “the contribution of supply-side factors to inflation is on a clear downward trajectory.”

Companies have faced drug shortages, higher shipping costs, manufacturing facility closures and hiring challenges that have led to supply shortages due to the COVID-19 pandemic. Since most of these problems are of a global nature, monetary policy has not been given any less of an answer.

Central banks are “uneasy to control supply-driven inflation,” CIBC’s Tal wrote in a report published on Friday.

“And while it’s true that, in terms of monetary policy effectiveness, the small Bank of Canada is stronger than the mighty Fed, it’s also true that that effectiveness is mostly about the demand-driven part of inflation.”

The latest inflation data for September is due to be released on Wednesday. The consensus showed economists expected consumer prices to rise 6.8 percent year-on-year, down slightly from the seven percent increase recorded in August. CIBC specifically forecasts September inflation to have fallen even further to 6.5 percent.

According to the Bank of Canada’s third-quarter Business Outlook Survey, most businesses believe inflation will remain above the bank’s two per cent target for the foreseeable future, although they see input costs and sales prices rising at a slower pace over the next 12 months. This survey was conducted from mid-August to mid-September.

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While the survey painted a picture of a tough operating environment, it also found that in more than a year, businesses began to report improved supply chain issues.

Improving supply chains, lower commodity prices and higher interest rates were the three main factors needed to lower inflation, companies said.

Michelle Zadikian is a senior reporter for Yahoo Finance Canada. Follow him on Twitter @m_zadikian.

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