Bank of Canada says firms' pricing behavior could stoke inflation

By Steve Scherer and David Ljunggren

OTTAWA (Reuters) - Canadian businesses have made larger and more frequent price changes since the pandemic, passing on higher costs to consumers, and that behavior could stoke inflation, the Bank of Canada said on Tuesday.

The Bank of Canada (BoC) held its key overnight interest rate at 5% on Sept 6, noting the economy had entered a period of weaker growth, but said it could raise borrowing costs again should inflationary pressures persist.

The Governing Council will make its next policy announcement on Oct. 25, when it also updates its economic forecasts.

Deputy Governor Nicolas Vincent, speaking to Montreal's Chamber of Commerce, said price increases coming out of the pandemic had been both more frequent and larger than usual.

"We believe that this behavior by firms - both here and abroad - is intimately linked to the stronger-than-expected inflation we've seen," he said.

Later in the speech, Vincent said: "Perhaps the biggest risk of all is the idea that recent pricing behavior could become self-perpetuating."

While there were signs of pricing practices gradually returning to normal, they are still not where they were before the pandemic.

The BoC has forecast inflation will gradually return to its 2% target by the middle of 2025, "but it is clear that we are not out of the woods yet" and "an unusual amount of uncertainty continues to cloud our view," Vincent said.

Canada's economy stalled in July and edged up slightly in August, data showed last month, prompting markets to trim bets for another interest rate hike.

But the annual inflation rate in August jumped to 4.0% from 3.3% in July on higher gasoline prices, a sign 10 interest rate hikes since March of last year may not be enough.

In the food sector, companies passed on almost all higher costs to consumers because "the business environment during the pandemic recovery was conducive to higher pass-through," Vincent said.

Canadian firms still expect their price changes to remain larger and more frequent than they were prior to the pandemic, Vincent said.

"It remains to be seen whether the recent declines in some input costs will be passed through to prices as quickly and fully as cost increases were over the past two years," Vincent said.

(Reporting by Steve Scherer, editing by David Ljunggren)