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Businesses need to boost productivity, investment to curb inflation: BoC governor

Click to play video: 'Bank of Canada holds interest rates for now, signalling hikes to come' Bank of Canada holds interest rates for now, signalling hikes to come
Despite mounting pressure to curb inflation, the Bank of Canada has opted not to raise its key interest rate. Since the start of the pandemic, it's been at 0.25 per cent. But the central bank is setting the stage for hikes that could come in March. So what does this mean for you? Nicole Stillger explains. – Jan 26, 2022

The governor of the Bank of Canada says higher interest rates are coming, but businesses also need to boost productivity to help keep rising prices in check over the long term.

Tiff Macklem, speaking virtually at a Canadian Chamber of Commerce event Wednesday, said businesses have an important role to play by increasing investments in worker productivity to create non-inflationary growth.

“Productivity growth is vital to non-inflationary growth and rising standards of living. At a time when inflation is already well above our target, this is more vital than ever.”

Read more: Bank of Canada holds interest rates for now, but signals hikes to come

Boosting worker productivity, which measures how much is produced in a set amount of time, is needed so that rising wages don’t lead to higher unit costs, he said.

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“Higher productivity pays for higher wages,” he said.

Canada has long lagged the U.S. in business investment, including in information and communication technology that plays an important role in driving productivity growth.

There are signs of increased spending on the way though, with the Bank’s most recent business outlook survey showed 62 per cent of firms plan to spend more on machinery and equipment in the year ahead than last year, the highest level since the survey started in 1999.

Indications are that business investment will grow faster in Canada than in the U.S., as long as businesses actually go ahead with the spending, said Macklem.

“It’s imperative that businesses in Canada follow through on these plans or risk losing out to U.S. competitors.”

Click to play video: 'Bank of Canada forecasts annual economic growth in 2022 to be 4%' Bank of Canada forecasts annual economic growth in 2022 to be 4%
Bank of Canada forecasts annual economic growth in 2022 to be 4% – Jan 26, 2022

He says businesses will also need to lean into the flexible and remote working arrangements created by the pandemic to allow access to a wider labour pool, while workers will also need to be prepared to keep their skills fresh.

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The bank said on Jan. 26 that higher interest rates are coming to bring inflation down from its current rate of close to five per cent. Its next scheduled rate decision is March 2.

Macklem said the bank signalled with “unusual clarity” that increased rates were coming because it was important to keep expectations around inflation in check.

“We must keep inflation expectations well anchored. If inflation expectations become unmoored, the costs of getting inflation back to target will be much higher.”

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