Bank of Canada interest rate cuts at risk as stagflation looms

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“New Downbeat Business Outlook Threatens Canada’s Inflation Goals”
Stagflation is looming on the horizon for Canada, as geopolitical events and a pessimistic business outlook are casting doubt on the Bank of Canada’s efforts to control inflation and cut interest rates. According to chief economist Sebastien Lavoie of Laurentian Bank of Canada, expanding global trade fallout from Red Sea corridor attacks and the latest Bank of Canada’s business survey point to potential stagflation.

Subhead: Looming Threat of Stagflation
Sebastien Lavoie’s analysis, following the release of December’s consumer price index data, indicates a concern about stagflation. With the pace of inflation accelerating to 3.4 per cent year over year, a discussion about stagflation has emerged once again, particularly after the economy contracted in the third quarter.

Lavoie emphasizes that while current economic conditions may not align directly with historical stagflation, the potential for a mild form of stagflation exists, with accelerating inflation and a restrictive monetary policy as likely outcomes. He points out that recent cost surges in essential trade routes, such as the Red Sea, could push Canadians to face a higher inflation rate.

Subhead: Geopolitical events Bearing down
The economist highlights how the crisis in the Red Sea shipping lanes is likely to affect global trade, specifically in commodities such as robusta coffee beans. The disruption of essential trade routs from Vietnam to top commodity buyers is amplifying shipping costs and extending travel times, leading to premium robusta futures for January delivery. This brewing crisis coupled with increased costs presents worrying signs for Canada’s economy.

Subhead: Conclusion
To avoid stagflation or its milder forms, Lavoie suggests that a higher degree of restrictiveness on monetary policy is the most viable solution. As the Bank of Canada prepares for its next interest rate decision, the looming threat of stagflation requires comprehensive and careful economic policies. With the ever-increasing geopolitical tensions creating economic ripples, the path ahead for inflation control and interest rates in Canada remains uncertain.



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