Bank of Canada says economic stimulus must stop earlier to tame inflation – Canada News

In hindsight, Bank of Canada Deputy Governor Paul Beaudry said governments and central banks should withdraw stimulus measures earlier as economies recover from the COVID-19 pandemic, which is likely to keep inflation under control.

In a speech at the University of Waterloo on Wednesday, Bewdry said that the rapid global decline in fiscal and monetary stimulus during the recovery from the pandemic would have likely led to lower inflation.

Bewdry said that one country’s fiscal and monetary policy has spillover effects in others that are not always accounted for.

He said that one of the lessons learned from the global financial crisis of 2008-2009 was that countries would have benefited from a more gradual withdrawal of stimulus due to spillover effects.

That lesson, he said, has influenced policy decisions during the pandemic. However, Beaudry noted that the economic crisis of COVID-19 was different and that public health measures meant that supply in many sectors could not keep up with demand as demand began to recover.

“Bottlenecks have occurred in these sectors due to higher demand driven by a combination of stimulus policies, closures and reopenings, as well as by consumers turning away from services.”

The deputy governor said the simultaneous stimulus provided by countries through government support programs and low interest rates had spillover effects globally and contributed to supply chain bottlenecks.

“It is likely that a somewhat faster global (stimulus) withdrawal will make all countries better off,” he said.

At the same time, Beaudry said the stimulus measures helped the economy recover faster than expected, with labor markets recovering six months before the global financial crisis.

“It is clear that fiscal policy actions prevented a worse outcome.”

Going forward, Beaudry said the Bank of Canada is focusing on clear communication with the public about its policy decisions to ensure Canadians do not expect high inflation to continue for an extended period.

Central banks generally worry when individuals and businesses expect inflation to remain high because those expectations can lead to higher prices.

Pewdry also addressed concerns some have raised that the central bank would need to engineer a major economic slowdown, or even a recession, to bring down inflation.

Beaudry said the Bank of Canada believes that people base their inflation expectations partly on past inflation and partly on central bank communications about where monetary policy is headed.

Statistics Canada released its August CPI report earlier on Tuesday, which showed inflation slowing to 7.0 per cent. And while inflation is heading in the right direction, Beaudry said, it is still “very high”.

The deputy governor said the bank tends to communicate effectively with the public about monetary policy to help alleviate some of the growing concerns about persistent inflation.

“The bank is committed to keeping its communications during this challenging period clear, simple and focused on our inflation mandate,” he said, adding that the more effective the bank is in its communications, the more likely it is to avoid a recession.

The deputy governor concluded by affirming the bank’s commitment to return inflation to its 2 percent target, thus fulfilling its mandate.

“We will continue to take whatever measures are necessary to restore price stability to households and businesses.”