Getting back to 2% inflation will take time and a period of weaker economic growth will be needed to reduce consumer price inflation, the Bank of Canada’s senior deputy governor said Thursday, adding that the bank central still expected to reach this target without triggering a recession.
Carolyn Rogers was speaking the day after the announcement of a new three-quarter point increase in the Bank of Canada’s key interest rate, in a speech intended for the organization Calgary Economic Development. The central bank also warned on Wednesday that the key rate would have to rise even further so that inflation can return to its target.
In the text of her speech, Ms. Rogers explained that the risk of seeing inflation take root had been assessed in the discussions that led to Wednesday’s interest rate hike.
Annual inflation in Canada was 7.6% in July, compared to 8.1% in June, due to lower gasoline prices.
However, the board’s concern stems from the bank’s key measures of core inflation, which tend to be less volatile, Rogers argued. This indicator rose in July, which “shows how strong core inflation remains in Canada,” she said in her speech.
Central banks tend to worry when individuals and businesses expect inflation to remain high, as this can lead to a self-fulfilling prophecy: businesses set future prices higher, while workers negotiate future salary increases to match their inflation expectations.
“We want to prevent this scenario from materializing, otherwise the economic cost of restoring price stability would be much higher,” Rogers said.
In a press conference with reporters after her speech, Ms Rogers said the bank still believed a “soft landing” was possible. In such a scenario, higher interest rates lower inflation without triggering a severe economic downturn.
“We believe there is room in the economy to calm it down and stay in positive growth territory,” Rogers said.
Ms Rogers also answered a question about the risk of a wage-price spiral, in which price increases would translate into higher wages and vice versa, and noted that the upward pressure on prices, in a context of labor shortages and rising cost of living, was understandable.
Governor Tiff Macklem has come under fire from labor leaders after suggesting at an event organized by the Canadian Federation of Independent Business that companies are not building high inflation into wage contracts.
“Workers are looking at inflation and what it’s doing to their purchasing power, to their budgets, and they’re looking at the same tight labor markets and they’re thinking, you know, I need a raise. It’s also completely understandable,” Ms. Rogers observed.
“It is not our job to provide advice on setting wages or prices. »
Instead, she says, the bank’s intention is to highlight the risk that Canadians watching inflation today will factor it into their long-term decision-making processes, which could cause inflation to remains higher for a longer period.
“Bringing demand to the same level as supply”
In her speech, Rogers said global supply chain challenges and high commodity prices, along with an overheated Canadian economy, continued to put upward pressure on prices.
“Since the economy is in a situation of excess demand, we need a period of weaker growth to rebalance everything and bring demand back to the same level as supply,” she explained.
The senior deputy governor said the bank would monitor the economy’s reaction to rising interest rates as well as global economic developments, and assess how much further interest rates need to rise.
Rogers said higher inflation and interest rates should reduce consumer spending, but the extra savings accumulated during the pandemic could swell household budgets.
“We know that Canadians have accumulated excess savings during the pandemic. So there is a risk that consumer spending will show more momentum than expected, making inflation more persistent,” she explained.
Decisions made by the bank in recent months could take up to two years to have their full effect on inflation, Rogers calculated.
“Getting inflation down to 2% will take some time. We also know there might be hurdles along the way,” she said.
In her speech, Ms. Rogers also acknowledged the effect of high inflation on people and businesses. For Canadians, the cost of daily necessities is rising, while for businesses, the uncertainty caused by higher inflation may affect investment decisions, she said.
“There is no escaping the stress and frustration that inflation causes, especially for low- and fixed-income households. »
Ms. Rogers concluded her speech by reiterating the bank’s commitment to reducing inflation.
“We are determined to make it happen,” she said.