Soaring gasoline prices and provincial sales tax increases have pushed inflation higher than expected and will keep the annual rate above 3% in the short term, Bank of Canada governor Mark Carney warned Monday.
However, in a speech and at a news conference later, he gave no hint as to when the central bank will start raising interest rates to rein in an inflation rate that was projected to have hit 3.5% last month, saying that inflation will fall back to the bank's 2% target by the middle of next year.
Instead, Carney warned of the risks posed by inflation in emerging markets.
The major risk to the global economy has shifted to inflation in emerging markets, like China, from the sluggishness of the recovery in the highly developed nations, like the U.S., he said.
"Last fall, the consensus was that a faltering recovery in advanced economies was a greater risk than overheating in emerging markets," Carney said. "Today, it is the opposite.
"Such reversals can be expected to continue," he added, in a speech in which he outlined the opportunities and risks for Canada from the global shift in economic power.
"It is a time of great opportunity for Canada, but navigating the cross-currents in the global economy will require boldness and skill," Carney said, adding that Canadian businesses need to put out more effort to win a greater share of those rapidly expanding emerging markets, governments here must remain committed to eliminating their deficits and the Bank of Canada has to keep a lid on inflation.
Carney emphasized that Canadian firms will have to develop deeper trade relations, including partnerships, in emerging markets and become more productive to take advantage of a historic long-term shift in global economic power, similar to the shift that occurred a century ago, when Canada was an emerging economy.
Canada is not benefiting from the boom in emerging markets to the extent it has in previous economic boom times, because only 10% of its exports go to those markets. "In tandem, Canadian business needs to improve its competitiveness, source new suppliers and prepare to manage in a more volatile environment," he said, suggesting Canada cannot rely on its natural resources alone to compete in the new global economy.
Governments here, meanwhile, as in other developed nations, will have to make fiscal adjustments to balance their books.
Investors, too, will have to adjust to the shift in global economic power, especially to the boom in emerging markets, he added. "Dramatic changes in the scale, composition and direction of capital flows will have important implications for returns for Canadian investors."
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