–BOC Deputy Governor Beaudry: Canada’s Aug CPI Eased to 7% Y/Y Rise But Still Too High
By Max Sato
(MaceNews) – The Bank of Canada’s policymakers will take whatever actions necessary to bring still too high inflation back to its 2% target and maintain people’s confidence in the bank’s price stability mandate, Deputy Governor Paul Beaudry said Tuesday.
He also said in a speech to the University of Waterloo Faculty of Arts that the bank will work with its international partners to “continuously improve how we respond as a group to shocks like the pandemic that have implications far beyond our own country’s borders.”
“We will continue to pay close attention to how this recovery differs from others we’ve experienced. This includes keeping an eye on the health of the labour market and on how public and private sector balance sheets evolve over time,” he said.
“And, most importantly, 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 of bringing inflation back to 2%,” Beaudry concluded.
Official data released Tuesday showed Canada’s annual inflation rate eased to 7% in August from 7.6% in July and 8.1% in June due largely to lower gasoline prices. But it is “still much higher than what we want,” said the deputy governor.
The best strategy for fighting high inflation is to work on people’s inflation outlook, he said. “If people understand and believe that the central bank will eventually bring inflation back to target, their expectations will remain ‘anchored,’” he added.
“Since we introduced inflation targeting in 1991, the bank has been largely successful at keeping inflation low, stable and predictable,” allowing Canadians to make saving and spending decisions and salary demands based on inflation running around 2%, Beaudry said.
“Today, that record is being seriously tested as we emerge from the first global pandemic in a century and face the effects of Russia’s unprovoked invasion of Ukraine,” he warned. “Both factors are contributing to inflation levels well above our target while also raising short- and medium-term inflation expectations.”
During this difficult time, the Bank of Canada is committed to keeping its communications “clear, simple and focused on our inflation mandate,” Beaudry said. “Our messages are designed to cut through the noise and simplify the difficult problems facing price- and wage-setters in this unusual environment,” he said.
The former economics professor said he believes people’s mindsets on prices lie somewhere between two theories.
The first theory assumes that inflation expectations are backward-looking, or “adaptive.” When inflation is high, inflation expectations will drift up, and central banks can’t rely on simple communication about future policy to bring them back down. Under these circumstances, policymakers are willing to tolerate a sizable economic downturn in the process of bringing high inflation down.
The second theory is that expectations are “rational” and firms and households are forward-looking. If the central bank’s commitment is credible, the private sector’s anticipation that inflation will return to target in the long term sets off a series of price- and wage-setting decisions. This greatly reduces the need to engineer a period of significant economic slack to get back to target on a sustainable basis.
During the question-and-answer session with students, Beaudry said he expects it “takes about two years” to bring inflation back to target, which is consistent with the bank’s projection made about two months ago.
In its quarterly Monetary Policy Report published on July 13, the bank sharply revised up its consumer inflation outlook for 2022 to 7.2% from 5.3% projected in its previous report issued in April. The bank also raised its CPI forecast for 2023 to 4.6% from 2.8% projected in April. As for the CPI in 2024, the bank forecast an annual rate of 2.3%, up slightly from 2.2% forecast three months earlier, but still close to its 2% inflation target.
Asked if it would be a good idea to create a digital currency that expires, which would force consumers to spend it by a certain date, Beaudry replied, “It’s not at all one of the things we are considering. If we put out a CBDC (central bank digital currency), it would not have that type of feature.”
The government decides whether to create a digital currency and the central bank has been analyzing different possibilities. If the bank were to issue a CBDC, he said, “We want something that looks secure and resembles a lot like cash and has that kind of feeling, and has its value and backed by the Bank of Canada.”
The bank on Sept. 7 raised its policy interest rate — the target for overnight lending rates — by 75 basis points to 3.25%, as widely expected, as part of its front-loading credit tightening drive to bring down four decade-high inflation, after hiking it by an unusually large 100 basis points in July for the biggest increase since 1998.
The BOC has now raised the policy rate for the fifth consecutive time totaling 300 basis points and its policymakers have said their job is not done yet, possibly following up with another rate hike, by 75 basis points, in the bank’s next policy decision on Oct. 26. The last policy meeting scheduled for the year is on Dec. 7.
The bank also indicated tightening may be coming to an end soon during the current cycle by saying, “As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target.”