The country's top central banker warned of uncertainty about how quickly three years of high inflation will return to the Bank of Canada's comfort zone.

Gov. Steve McCracken told the Senate Banking Committee Wednesday that the uncertain outlook is due to unique circumstances surrounding the pandemic and the global reopening of the local economy.

Macklem said the supply chain problems that led to higher transportation costs and consumer prices could last longer, as he noted that they were more persistent and widespread than the bank had initially expected.

The result was that annual inflation climbed to 4.8% in December, a rate not seen since September 1991.

Macklem told senators that annual inflation is likely to remain at a "disturbingly high" rate of around 5 per cent in the first half of 2022, noting that this will affect low-income Canadians as gas and food prices rise.

Uncertainty about the outlook prompted senators to ask Macklem to defend the bank's recent forecast that inflation would fall close to the Bank of Canada's comfort zone by the end of 2022, as previous inflation forecasts had turned out to be far from the previous projections.

If commodity price pressures ease quickly or even reverse, inflation could fall faster than expected, Macklem said. On the other hand, he said, supply chain problems could last longer like a pandemic.

"The virus is still present. Omicron could affect production facilities in other parts of the world. So there's definitely still some uncertainty," McCollum told senators.

"What I do want to emphasize, though, is that we will, and we are, working to manage that uncertainty."

He noted that the bank made it clear that interest rates would have to rise to bring inflation back to the bank's 2% target.

The Bank of Canada left its key policy rate unchanged at 0.25% late last month, the level at which it has been since the pandemic broke out in March 2020, but abandoned its commitment to keep rates at their lowest level.

Statistics Canada reported Tuesday that real gross domestic product in November was just above the pre-pandemic level of February 2020. McCollum said the data reinforces the bank's view that the economy has returned to productive capacity.

He also noted that employment is above pre-pandemic levels, companies are having trouble filling job openings and wage growth is accelerating.

Coupled with high inflation, economists believe the Bank of Canada will raise its trend-setting interest rate in March, although Macklem did not say when the increase would begin, how much the bank would rise, or how many times it would rise throughout the process. That year.

"Clearly, interest rates need to rise," McCollum said. "The slope of that path will depend on economic development, and if consumers spend more, then the slope of that path will likely have to be steeper."

An increase in the central bank's key interest rate will affect rates such as pledged loans. Macklem also said that once interest rates rise, the central bank plans to reduce its holdings of federal bonds, which will also push up interest rates.

© 2022 Canadian Press