Could Russia-Ukraine change Bank of Canada path on rate hikes?

As the Bank of Canada continues to weigh up its approach to policy rate hikes in 2022, the ongoing crisis in Ukraine looks set to factor prominently in its decision-making process.

In its opening rate announcement of the year at the end of January, the Bank hinted at potentially murky waters ahead, citing “rising geopolitical tensions” as a factor for possible future tightening of financial conditions.

That statement arrived amidst rapidly growing fears of a possible Russian invasion of Ukraine, with Moscow amassing troops at the border and US President Joe Biden warning his Ukrainian counterpart Volodymyr Zelenskyy of the “distinct possibility” of Russian military action.

Russia’s assault on Ukraine had already begun by the time of the Bank’s next rate announcement, causing it to label the invasion as a “major new source of uncertainty” that caused swift spikes in the price of oil and other commodities.

“This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth,” it said.

The Bank also noted that financial market volatility had increased since Russia launched its invasion, describing the situation as a “fluid” one that it was following closely.

As it gears up for its hotly-awaited third rate announcement of the year on April 13 – one that’s widely anticipated to herald a further increase to its trendsetting interest rate – could the disturbing events in Ukraine give the Bank pause for thought on the path it’s mapped out?

Read more: Russia-Ukraine crisis: How sanctions could impact Canada's economy

That’s unlikely, according to Scotiabank’s chief economist and senior vice president Jean-François Perrault (pictured) – mainly because the crisis is one that’s exacerbated inflation across the world, not least in Canada where that phenomenon was already at a 30-year high.

“I think [the Bank] will push on regardless because the Ukraine war shock is ultimately inflationary. It creates uncertainty, of course, it’s led to some financial market volatility,” he told Canadian Mortgage Professional. “But it’s without any question led to significantly higher commodity prices, which are inflationary for all countries.”

Canada is shielded by some of the economic impacts of the war, Perrault said, because it exports many of the commodities that Russia is currently having a hard time shipping out due to the sweeping international sanctions imposed against it.

Still, worsening inflation will weigh heavily on the Bank’s mind, he said, a factor that will most likely lead it to continue with its planned schedule on interest rate hikes – barring a major negative turn of events in Ukraine.

“Relative to Europe, we are much more protected from the gross impacts of what’s happening in Ukraine, but we’re dealing with very similar inflation impacts,” Perrault said.

“So that, combined with the fact that inflation in Canada was already well outside of the target range… [means] it’s difficult to see how the situation in Ukraine, unless it deteriorates dramatically, would give pause to [the Bank], certainly in the next few weeks.”

Inflation has spiralled upwards in Canada in recent months, with Statistics Canada reporting that it reached a fresh three-decade high in February – exceeding 5% for the second consecutive month.

Consumer prices swelled by 5.7% on an annualized basis, seeing the trend creep toward the 6% high of August 1991, and gasoline prices continued their stunning surge since Russia launched its unprovoked action in Ukraine.

Read more: Russia-Ukraine crisis: How will it impact Canada's economy?

Compared to the same month last year, pump prices were up a massive 32.3% in February, rocketing 6.9% over the January figure with prices for other fuels also witnessing an 8.5% spike.

Earlier in March, Canadian Imperial Bank of Commerce (CIBC) deputy chief economist Benjamin Tal told CMP that the inflationary threat of the Russia-Ukraine crisis was the main potential economic pitfall of the war for Canada.

He said the impact of a prolonged conflict on economic growth and GDP was likely to be comparatively small because of Canada being “twice removed” from the situation.

BMO Financial Group’s chief economist and managing director Doug Porter also mentioned Canada’s “unique place” in the global economy during the Russian aggression, although he noted that it wouldn’t be fully insulated from the damaging economic impacts.

“We can all see the headlines about record gasoline prices and how it might deliver a shock to consumers. So I do fear that there can be some secondary effects that ultimately turn this into being a negative for the Canadian economy,” he said.