Bank of Canada says inflation remains too high amid weak data

A senior Bank of Canada official said Canadian inflation appears to be headed in the “right direction” but is still very high.

In a speech on Tuesday, Deputy Governor Paul Bewdry said the central bank needed to work hard to ensure inflation expectations were not entrenched at higher levels, with “coherent, clear and reliable” public messages that it remained focused on 2 per cent. targeting.

His comments come hours after a Statistics Canada report showed annual inflation slowed to 7 percent in August, from 7.6 percent in July. “While we’re going in the right direction, that’s still pretty high,” Beaudry said.

“We will continue to take whatever measures are necessary to restore price stability to households and businesses and to maintain Canadians’ confidence in our ability to fulfill our mandate,” the deputy governor said.

Two weeks ago, policymakers led by Governor Teff McClem raised the benchmark interest rate by 75 basis points to 3.25 percent, a full three percentage points higher than the emergency pandemic low that ran through March. They are expected to rise again in October.

Bewdry’s lecture at the University of Waterloo was on lessons from the policy response to Covid-19, including the need to consider the global spillover effects of domestic policy decisions and the role of inflation expectations.

The more companies are convinced that inflation will come down, the more likely it is, Bewdry said. Preventing inflation expectations from waning will help policy makers to rein in price pressures without incurring the same economic cost.

To avoid a wage-price vortex, “some have suggested that policymakers may need to engineer a significant slowdown — or even a recession,” he said. But if the inflation target’s commitment is credible, “this greatly reduces the need to engineer a period of major economic stagnation to return to the target on a sustainable basis.”

However, Beaudry acknowledged that Canada’s record of keeping inflation close to target is being “seriously tested”.

Given that inflation is well above the target and its trajectory is uncertain, companies are less confident in applying a “general rule” that inflation will “develop close to the target”

“This is where direct and effective communication on monetary policy plays an important role – it helps guide and coordinate these challenging thought processes,” Beaudri said.

More highlights:

  • about policy implications. “It is important to understand how the policy choices of individual countries collectively determine the overall level of global stimulus and to consider whether this level is appropriate.”
  • As the pandemic stimulus spreads across the world, “the end result was that during the recovery phase of the pandemic, a somewhat faster global withdrawal would likely make all countries better off.”
  • Fiscal policy (and monetary policy in a supportive role) prevented a much worse outcome during the pandemic, and preserved private sector balance sheets that could have led to a weaker recovery