NEW YORK (MaceNews) – Canada’s economy is likely to emerge from the Covid-19 shutdown period with weaker supply and demand, and lower inflation, due to shutdown “scarring,” Bank of Canada Deputy Governor Tim Lane said Wednesday.
“While the steps we have taken should help, we are likely to emerge from the shutdown with both demand and supply weaker than before, Lane said in remarks for delivery to industry groups.
“The scarring associated with the shutdown could lower productivity, which tends to result in higher inflation. But the bank’s analysis suggests that the decline in demand stemming in part from weaker business and consumer confidence is likely to have a larger effect. On balance, there is likely to be downward pressure on inflation.”
The bank has already cut rates and conducted market operations to address the likelihood of inflation below target, Lane said. “We can adjust these operations as needed to head off a move of inflation in either direction from the target,” he said.
Lane was speaking on the day Statistics Canada reported annual consumer price inflation fell to minus 0.2 percent, for the first year-on-year decline in the CPI since September 2009. He said the CPI figures are now less meaningful than usual given the pandemic’s impact on spending patterns, and on gasoline prices.
“The most recent data indicate that inflation has declined sharply,” Lane said. “But that is due less to overall economic slack than to some specific factors—especially the drop in prices of gasoline and travel services, as well as shifts in spending. These shifts mean that the standard consumer price index, based on the cost of a fixed basket of goods, is less meaningful.”
“While many of these changes will reverse when businesses reopen, we expect to see some persistent price effects, which will differ across products and services,” he said.
Given the impact of business closures on available supply, steps to boost demand are less effective, and policy needs to look further ahead, Lane said. “Moreover, stimulating demand cannot do much to influence inflation as long as the stores, and indeed much of the economy, remain closed,” he said.
“In this setting, monetary policy needs to be even more forward looking than usual, seeing beyond the shutdown to its potential implications for the subsequent recovery.”