If interest rates move quickly it would show the vulnerabilities in Canada’s economy: Former BoC governor
When it comes to the state of the economy, particularly during a federal election campaign marred by the COVID-19 pandemic, a former Bank of Canada governor likens it to be a “tripod of angst.”
Stephen Poloz, who spent seven years at the helm of the central bank until 2020, said many Canadians are “understandably distraught” by the handling of federal finances.
“There is a sort of tripod of angst among regular folks: high government debt, the possibility that we’ll have higher taxes, and higher inflation connected to that debt,” Poloz said in an interview Tuesday. “People need some reassurances.”
Still, Poloz debunks fears of runaway inflation, adding there is a reason why “this hasn’t been an issue for people for nearly 30 years and suddenly it is.”
While prices have in fact risen significantly over the past year, he said that’s only a natural trajectory and shouldn’t be conflated with woes of inflation.
“Prices have risen, as they should when demand exceeds supply. Some wages have gone up, and that should also happen when demand exceeds supply,” said Poloz.
There are also supply chain concerns that add to price increases, given that Canada’s economy is “far more trade-dependent than almost every other major economy,” he added.
“We can point to specific things and we can explain them, but those things don’t add up to a persistent inflation. What they add up to is a higher price here and there.”
The consumer price index rose 3.7 per cent on an annualized basis in July, and Bay Street is estimating the gauge jumped 3.9 per cent year-over-year in August, according to data tracked by Bloomberg. The consumer price index for last month will be released Wednesday.
“There are longer term issues that we need to keep an eye on, so I don’t dismiss inflation fears out of hand,” said Poloz. "It is a tricky thing to navigate, especially when you factor in other vulnerabilities. That doesn't mean we don't have many mitigating factors at play that are making things easier to handle."
The commodities boom that has played a big role in stirring inflation fears also propelled the loonie earlier this year, pushing it as high as 83 cents against the U.S. dollar in June. That sort of move tends to raise alarm for export-related sectors, which are put at a disadvantage when the Canadian currency rallies.
Asked about whether this should be cause for concern, Poloz said apart from the average "mindfulness from businesses,” the loonie isn’t much to worry about.
He said Canada entered the pandemic with an enviable position for most comparable nations and, for the most part, it’s kept that up during each wave of the virus.
The biggest worry for the country’s economy has to do with whether another crisis is emerging at the tail end of the pandemic in Canada or elsewhere, said Poloz.
“Lots of countries can’t do the things we’ve done, but they’ve tried. So, they’ve put themselves in a much more strange situation. This is where I’m more concerned about inflation and how the global ramifications affect us,” he said.
“You take where we’re in now and layer on top another Asian financial crisis? Well, that would be a real setback.”