Deputy governor Sharon Kozicki signals greater flexibility as global supply pressures complicate inflation and growth
A pivotal speech from a senior Bank of Canada official is offering fresh insight into how the country’s central bank is thinking about inflation, interest rates and economic risk in a world increasingly shaped by supply disruptions rather than excess demand.
Addressing an international monetary policy conference in Oslo, Deputy Governor Sharon Kozicki outlined how structural changes in the global economy are complicating the Bank’s long-standing inflation-targeting framework. While the 2 per cent inflation goal remains firmly in place, she made clear that achieving it may require more nuanced decision-making as supply-side shocks become more persistent.
Monetary policy decisions may hinge less on traditional demand metrics and more on diagnosing the source of inflation itself.
“Supply-side developments can lead to trade-offs for monetary policy. And sometimes, these developments can result in a combination of a weak economy and high inflation,” Kozicki said.
That combination presents a difficult balancing act. In the past, inflation was often the result of overheating demand, which could be tempered by higher interest rates. Today, price pressures are more likely to stem from disrupted supply chains, shifting trade relationships, demographic changes and technological transformation. In those cases, raising rates could further weaken growth without fully addressing the inflationary impulse.
Kozicki drew a distinction between what economists sometimes describe as “good” and “bad” supply shocks. Productivity gains or technological innovation can expand supply, supporting growth while easing price pressures. By contrast, supply bottlenecks, tariffs or geopolitical fragmentation can simultaneously constrain output and push prices higher.
“During the pandemic, we saw major disruptions in supply chains, which caused delayed deliveries and shortages of many goods,” Kozicki said.
Although the acute phase of the pandemic has passed, she suggested that similar forces continue to shape the global landscape. The reconfiguration of global trade networks, the adoption of artificial intelligence and demographic aging are all influencing how economies produce and distribute goods and services. For a small open economy like Canada’s, those developments carry particular weight.
The Bank’s flexible inflation-targeting framework is designed to return inflation to 2 per cent over time, rather than immediately, allowing policymakers to smooth out economic volatility. Kozicki emphasized that this flexibility is a strength, especially in an environment where rigid responses could amplify downturns.
This signals that rate decisions may not always follow historical patterns. If inflation is being driven primarily by cost-push factors rather than demand, the Bank could tolerate a slower return to target in order to avoid inflicting unnecessary damage on employment and output. Conversely, if supply improvements help ease price pressures, the Bank may have room to support growth without jeopardizing its credibility.
This evolving backdrop matters for portfolio construction. Fixed-income strategies that rely heavily on predictable rate cycles may face greater uncertainty. Equity sector performance could also diverge more sharply depending on how supply dynamics affect input costs and profit margins. Currency movements may become more sensitive to trade policy shifts and global production trends than to domestic demand indicators alone.
Kozicki’s remarks come as the Bank and the federal government prepare for the next renewal of Canada’s monetary policy framework. While there is no suggestion that the 2 per cent target will be abandoned, the speech indicates that policymakers are actively reflecting on how best to operate in a world where supply disturbances are more frequent and more persistent.
Understanding not just the level of inflation, but its underlying cause, will be essential in anticipating the Bank of Canada’s next moves. In a supply-driven era, the path of interest rates may be shaped as much by global trade flows and production capacity as by consumer spending and labour market tightness.
