As the Bank of Canada will soon provide an update on its key rate at the end of the month, what can we expect? Nicolas Vincent, deputy governor of the institution, answers our questions on inflation, interest rates and the strength of the economy. Comments collected by Clémence Pavic.
What is your reading of the current economic situation in Canada?
One thing to say straight away is that we have seen inflation fall significantly. We went from around 8% to 3% this summer, and there we went back up to 4%, mainly due to the increase in prices
Energy.
So, there has been progress, but inflation remains widespread, that is to say it is not driven by just a few elements. This is almost half of the consumer price index basket (which is currently growing at a rate of more than 5%).
To combat this inflation, interest rates have been increased to slow down demand and the economy. The idea is really to “slow down”, not “stop”. Based on our latest forecasts, from July, we continue to expect growth of around 1% or a low positive rate until mid-2024, and we still see a landing in candy.
Why does inflation remain so high, even though the pandemic and the supply chain disruptions it caused are behind us?
To explain inflation, we can start from what we know. Inflation can be fueled by supply shocks, such as during the pandemic. It can also be caused by excess demand. At the moment, the labor market remains tight — even if it is gradually rebalancing — which is supporting demand. And consumption was also strongly supported by an accumulation of savings during the pandemic.
We understand these factors. But we must be completely humble here: even if we take these factors into consideration, there is still a part of inflation that is difficult to explain. She is more persistent, more tenacious than we expected.
So why ? One such factor is the pricing practices of companies. During the pandemic, companies tended to increase their prices more significantly and more frequently than usual. This means that companies are able to pass on their cost increases in their prices more quickly.
There is a risk of a spiral. If you expect your competitors to change prices more often and more significantly, you say to yourself: “Why not do it? » So, it creates a vicious circle. If this is a scenario that were to materialize, it would be problematic for the return to low, predictable inflation.
Concerning interest rates, have we reached a stabilization phase? Can borrowers hope for a little relief, or even rate cuts?
We are fully aware that our actions have an impact on the finances of Canadians and we never take these decisions lightly. I have been involved in four decisions so far, and believe me, each time, we think about these things and we especially want to not do more than is necessary.
But the reality is that at this point, it is still too early to talk about lowering interest rates. Core inflation is still too high. As we get closer to the 2% target, we can expect the possibility of seeing rates fall. And it could happen before we reach this target, because we know that it takes a certain time before we feel the full effects of our actions.
We make decisions one at a time!
Until now, the Bank has maintained that Canadians still have a “cushion” of savings accumulated during the pandemic which helps them absorb rate increases. Does this cushion exist?
Again ?
This “cushion” is not easy to measure. But our latest estimates seem to indicate that Canadian households continue to have a relatively large cushion, historically speaking, which stands at around 15% of consumption.
It’s an average. There are big differences depending on the household! We know, for example, that this cushion disappeared much more quickly among the most deprived.
There are parts of the population that face greater financial stress. But in general, indicators of financial stress remain lower than before the pandemic.
Why do we persist in bringing inflation to 2%? Could we be more flexible and tolerate inflation
by 3%?
This 2% target has served Canadians very well to date. There are plenty of advantages to having low inflation.
On the one hand, it helps strengthen competitive forces in the economy. When inflation is at 2%, large and frequent price increases are more easily noticed. This makes companies more reluctant to pass on their cost increases in their prices.
On the other hand, when inflation is at 2%, we don’t need to worry about it, nor to constantly ask ourselves how to protect ourselves from it. This is particularly important for the poorest, who often do not have access to certain asset classes.
As for tolerating inflation of 3%, if we start doing it and there is an inflationary shock, such as a climatic event or a war, that would take us to 4%, or even 5%. . It is important to anchor the behavior of households and businesses around a credible target. And for us, it’s 2%. This is the mandate we were given by the government.
Is an increase in the key rate possible during your next announcement, on October 25?
What we want to give back to Canadians is a low inflation rate so that they no longer have to worry about that. We want to make sure we don’t overdo it, but if core inflation doesn’t fall, we’re prepared to raise rates if necessary.
This interview has been edited for clarity and brevity.