BoC realizing difficulty in achieving true soft landing: TD economist
Canadian inflation appears headed in the “right direction” but remains too elevated, a top Bank of Canada official said.
In a speech Tuesday, Deputy Governor Paul Beaudry said the central bank needs to work hard to ensure expectations for inflation don’t become entrenched at higher levels, with “coherent, clear and relatable” public messaging that it remains focused on its 2 per cent target.
His remarks come hours after a Statistics Canada report showed annualized inflation slowing to 7 per cent in August, from 7.6 per cent in July. “While we’re headed in the right direction, that’s still too high,” Beaudry said.
“We will continue to take whatever actions are necessary to restore price stability for households and businesses and to maintain Canadians’ confidence that we can deliver on our mandate,” the deputy governor said.
Two weeks ago, policy makers led by Governor Tiff Macklem raised the benchmark overnight interest rate by 75 basis points to 3.25 per cent, up a full three percentage points from the emergency pandemic low that held until March. They are expected to hike again in October.
Beaudry’s lecture at the University of Waterloo was on lessons learned from the policy response to Covid-19, including the need to consider global spillover effects from domestic policy decisions and the role of inflation expectations.
The more businesses are convinced inflation will fall, the more likely it is to happen, Beaudry said. Preventing inflation expectations from de-anchoring will help policy makers curb price pressures without as much economic cost.
To avoid a wage-price spiral, “some have suggested that policy-makers may need to engineer a substantial slowdown -- or even a recession,” he said. But if the inflation target commitment is credible, “this greatly reduces the need to engineer a period of significant economic slack to get back to target on a sustainable basis.”
Beaudry acknowledged, however, that Canada’s record of keeping inflation near target is “being seriously tested.”
Given how inflation is well above target and its trajectory is uncertain, businesses are less confident in applying a “rule of thumb” that inflation will “evolve close to target”
“This is where direct, effective monetary policy communication has an important role to play -- helping to guide and coordinate these difficult reasoning processes,” Beaudry said.
- On policy spillovers. “It’s important to understand how the policy choices of individual countries collectively determine the overall level of global stimulus and to consider whether that level is appropriate”
- With pandemic stimulus rippling around the world, “the net result was that, during the recovery phase of the pandemic, it’s likely a somewhat faster global withdrawal process could have made all countries better off”
- Fiscal policy (and monetary policy in a supporting role) prevented a much worse outcome during the pandemic, preserving private sector balance sheets that could have led into a weaker recovery