Blockades at the Ambassador Bridge will only turn up the heat on already soaring inflation levels in the days ahead, economists predict, putting further pressure on the Bank of Canada to act on interest rates next month.
Friday marks the fifth day of blockades at the Ambassador Bridge, the busiest land border crossing between Canada and the United States. The protests in solidarity with the so-called “Freedom Convoy” have pushed Ontario Premier Doug Ford to declare a statement of emergency as automotive manufacturers reduce or cancel shifts and demonstrations in Ottawa hit the two-week mark.
The southern Ontario blockades hit a critical port for Canada-U.S. trade, says Ambarish Chandra, associate professor of economics at the University of Toronto.
Two-thirds of trade between Canada and the U.S. takes place over the shared massive land border, with as much as 30 per cent of that volume crossing the Ambassador Bridge in particular, representing $400-million worth of goods per day, he says.
While automotive parts and other consumer goods rely heavily on the Ambassador Bridge, fresh food, such as agricultural imports from Florida, is a critical portion of that trade.
“The Ambassador Bridge closing is going to have an impact on fresh food pretty fast,” Chandra tells Global News.
Expect short-term inflation spike
Canada is already facing a 30-year-high in annual inflation, according to the latest Consumer Price Index results. It’s even higher south of the border, hitting 7.5 per cent last month.
Supply chain shortages — cited as a key cause of ongoing inflation — will only be made worse amid the blockades, Chandra explains.
“Anytime we see shortages, we see prices rise. And we’ve seen that with cars, we’ve seen that with many goods over the course of the pandemic. We’re going to see that with fresh food, for sure,” he says.
“I would imagine we will see as soon as next week much higher prices and then some real shortages, if this carries on.”
Benjamin Reitzes, a managing director at BMO Capital Markets, agrees that the blockades will hit consumer prices in the days ahead.
“This could lead to another wave of price increases, maybe a little bit sharper in the short term. So there’s definitely some inflationary impact,” he tells Global News.
More pressure on inflation is likely not what the Bank of Canada wanted to see, Reitzes notes. The central bank flagged in late January that rock-bottom interest rates will start to rise with inflation well above its target of one to three per cent as the Canadian economic expected to rebound from Omicron-related closures in the months ahead.
But uncertainty around these blockades could put a damper on the bank’s outlook, Reitzes says.
He says he expects the blockades will cause a “drag” on Canada’s economy, particularly in the auto industry and manufacturing sector more generally, but adds it’s too soon to adjust forecasts as a result of the latest disruptions.
“What this all comes down to is just how long are these blockades going to last? And the longer they go, the greater the impact,” Reitzes says.
Interest rate decision pending
The Bank of Canada’s next chance to control inflation by hiking interest rates comes on March 2.
While there’s “chatter” about raising rates by 50 basis points in the central bank’s first hike since the COVID-19 pandemic began, Reitzes says 25 basis points is a more likely starting point.
He says the central bank has attempted to position itself as a “source of stability” for markets amid political and pandemic uncertainty, and will use its next rate hike as a chance to “reinforce faith that the public has in the bank that they can control inflation.”
BMO is currently holding its prediction that interest rates will rise 25 basis points in four consecutive central bank decisions this year. Others, such as Scotiabank Economics, have predicted interest rates hitting two per cent by the end of 2022.
If the Bank of Canada were going to jump immediately to 0.75 per cent from its current 0.25 per cent floor, Bank of Canada governor Tiff Macklem would have signalled as such during a mid-week speech, Reitzes says.
“Governor Macklem had every chance to hint at that on Wednesday. He did not do so.”