The Bank of Canada has issued a warning about the risk of inflation slowing down too much due to an excess supply of goods and services in the economy. This comes as the central bank continues to monitor the effects of its interest rate hikes, which were meant to control rising prices. While inflation has eased in recent months, there’s concern that it could drop more than expected, which may slow economic growth and lead to lower business activity.
Governor Tiff Macklem explained that while reducing inflation is essential, there's a risk of overdoing it. The central bank's policies have already brought inflation closer to its target range, but too much of a slowdown could weaken the economy. Companies may start cutting prices to get rid of excess inventory, which would affect their profit margins and potentially lead to job losses. Macklem emphasized the need to strike a balance between lowering inflation and keeping economic activity stable.
One of the key factors driving this excess supply is the global economy. Slowdowns in other major markets like the United States and Europe are affecting demand for Canadian exports, leading to more unsold goods domestically. This adds pressure on Canadian businesses to lower their prices, which could further slow inflation. While this might seem positive for consumers in the short term, the long-term effects could harm economic growth.
The Bank of Canada is closely watching these trends and may adjust its policies if needed. However, Macklem stressed that managing inflation is still a priority. The challenge now is ensuring that the efforts to curb inflation don’t push the economy into a significant downturn. This delicate balancing act will determine how the Canadian economy fares in the coming months.
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