MNI: Fraying World Trade Making CPI Higher, More Volatile- BOC

Bank of Canada Governor Tiff Macklem said Tuesday that monetary policymakers face more difficult choices as a fraying commitment to global trade tends to make inflation faster and more volatile.

Supply disruptions alongside the fading post World War II commitment to globalization also point to higher prices alongside slower economic growth, Macklem said in the text of a speech he's giving in London to the Canada-UK Chamber of Commerce. 

"Trade disruptions may mean larger deviations of inflation from the 2% target," he said. "Supply shocks present central banks with a difficult trade-off -- monetary policy can’t stabilize growth and inflation at the same time. That means we have to focus on risk management, balancing the upside risks to inflation with the downside risks to economic growth."

The speech didn't touch on the near-term outlook for the Bank's policy interest rate that was lowered for a third time last week in a decision where Macklem had said more moves can be justified as inflation fades back to target. In his remarks Tuesday Macklem suggested that over the longer haul borrowing costs may settle at a higher level than in the past in part because of fading trade ties after the 1990s.

"With globalization slowing, the cost of global goods may not decline to the same degree. All things equal, this could put more upward pressure on inflation," he said.

Macklem touched on stalled talks between the UK and its former colony of Canada as an example of difficulties around growing trade. Canada is one of the most trade-dependent nations in the G7 and faces challenges keeping its share of exports to its dominant partner in the U.S. amid China's rise. While global trade has faded in part because some easy gains have already been tapped, recent global conflicts are adding to the malaise, he said.

"Public and political support for open trade is also waning, in part because the benefits have not been evenly shared," Macklem said. "When low-cost importers undercut domestic producers, workers who lost their jobs lost more than they gained. With changing economics, new security threats, and waning support, global trade is being rewired, recast and redirected."

Canada's loss of competitiveness also took up a good part of the speech, with Macklem pointing a to decade now where export growth has slowed and failed to keep pace with economic expansions in its two biggest markets -- the US and the EU. "The slowdown is fairly widespread. Production and exports of machinery and equipment, motor vehicles and other non-energy goods have not expanded in more than a decade," he said. 

"At the start of the millennium, Canada had the biggest share of US goods imports, at about 20%. By 2017, China had the largest share, and Canada had fallen to third place," Macklem said. "As the United States finds new partners to supply the goods it once got from China, Canada is starting to reassert itself. In the first quarter of 2024, Canada was the second-largest source of US goods imports after Mexico, and exports were ticking up."