Inflation still too high, Bank of Canada says amid softer data

Published Wed, Sep 21, 2022 · 06:44 AM

CANADIAN inflation appears headed in the “right direction” but remains too elevated, a top Bank of Canada official said.

In a speech on Tuesday (Sep 20), deputy governor Paul Beaudry said the central bank needs to work hard to ensure expectations for inflation don’t become entrenched at higher levels, with “coherent, clear and relatable” public messaging that it remains focused on its 2 per cent target.

His remarks come hours after a Statistics Canada report showed annualised inflation slowing to 7 per cent in August, from 7.6 per cent in July. “While we’re headed in the right direction, that’s still too high,” Beaudry said.

“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,” the deputy governor said.

Two weeks ago, policymakers led by governor Tiff Macklem raised the benchmark overnight interest rate by 75 basis points to 3.25 per cent, up a full 3 percentage points from the emergency pandemic low that held until March. They are expected to hike again in October.

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

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The more businesses are convinced inflation will fall, the more likely it is to happen, Beaudry said. Preventing inflation expectations from de-anchoring will help policymakers curb price pressures without as much economic cost.

To avoid a wage-price spiral, “some have suggested that policy-makers may need to engineer a substantial slowdown - or even a recession”, he said. But if the inflation target commitment is credible, “this greatly reduces the need to engineer a period of significant economic slack to get back to target on a sustainable basis”.

Beaudry acknowledged, however, that Canada’s record of keeping inflation near target is “being seriously tested”.

Given how inflation is well above target and its trajectory is uncertain, businesses are less confident in applying a “rule of thumb” that inflation will “evolve close to target”.

“This is where direct, effective monetary policy communication has an important role to play - helping to guide and coordinate these difficult reasoning processes,” Beaudry said. BLOOMBERG

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