Unmentioned were geopolitical risks, particularly the effect of the disruption of maritime traffic in the Red Sea, its impact on shipping costs, and the knock- on effects on inflation. [...] If inflation spikes as a result of these disruptions, what should the Bank of Canada do and how should this affect the Bank’s communication? Rocket attacks from Yemen are forcing the 12 percent of global shipping that uses the Red Sea and Suez Canal around the Cape of Good Hope. [...] The trust households and businesses have in the Bank’s willingness to do what’s necessary to hit the 2-percent target would be under threat. [...] The Bank could explain from one announcement to the next how the breakdown changed, what factors were responsible – in this example, the conflict in the Middle East – and whether they expect the shock to be sufficiently temporary to leave rates unchanged. [...] The Bank must walk the tightrope between looking through the events over which it has no control, such as geopolitical tensions, and not losing the credibility of hitting its 2-percent inflation target.
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