With inflation becoming a regularly politicized topic as debates over the cost of breakfasts rule the day, the former Bank of Canada (BoC) governor says there can’t be anyone on the political spectrum who deserves blame.
Speaking to Global News’ Abigail Bimman on The West Block regarding the upcoming fiscal update, Stephen Poloz, now a special adviser at Osler and former governor of the BoC, said that Canada’s ability to navigate the pandemic with results that weren’t far more drastic economically should be commended.
“Aren’t we lucky that the policies worked well to prevent the second Great Depression, which is what many economists were worried about when we first encountered the COVID-19 shock,” Poloz said.
However, he added that while Canada chartered a path towards recovery amid concerns of deflation with debt that could’ve potentially caused a depression, now is time to continue focusing on growth.
“People want to be reassured that the fiscal plan is a sustainable one,” said Poloz. Given the rising costs Canadians are facing, they’re going to want to see a plan that will ease tensions, he added.
Finance Minister Chrystia Freeland’s fiscal update is set to be similar to those that were released following the 2015 and 2019 elections, according to Reuters. The update is expected to touch on COVID-19 support for businesses and continue to chart a path for recovery during the pandemic.
Poloz mentioned that he, along with other Canadians, will be looking to see where the deficit in the debt plan fits in, if there will be new taxes that could hamper economic growth and what will happen to internal trade barriers between provinces. He added that one temporary increase he would look to that would not slow growth, but rather support the Canadian economy, is an increase in sales tax.
What could slow growth, he said, was if there are more lockdowns due to further complications with the COVID-19 pandemic as new variants emerge.
“My sense is that economic growth, once we’re past the bust and recovery of the COVID shock, the trend rate of growth of the economy is actually going to be fairly modest,” he said.
Inflation — a slow-moving process
According to the BoC, inflation, as measured by the consumer price index, has been higher than the Bank’s 2.0 per cent target. The BoC said that supply constraints have affected the price of goods with inflation in 2021 hitting 4.4 per cent. The steep rise in inflation in one year is unprecedented given the data from before the pandemic, where during a span of 20 years, it only averaged 1.4 per cent.
Poloz said that inflation is often a slow-moving process over several years, but the sharp rise in costs is an indicator that it is likely coming from “temporary factors.”
According to the Bank of Canada website, the steep inflation increase has been due to “strong demand combined with disruptions in supply” leading to “higher costs for businesses and higher prices for consumers.”
On Dec. 9, the BoC’s deputy governor Toni Gravelle in a speech said the central bank remains “resolute in its commitment to keep inflation under control” in Canada.
With Canadians paying more at the grocery store now than a year ago, Poloz mentioned that any measures used to curb inflation need to be well thought out, as we don’t know the extent of what is happening.
“We’re in the zone now where fine judgments have to take place,” he said. “We won’t know really what inflation is for about another six or nine months.”
Time for key interest rate to rise
Since the pandemic began in March 2020, the BoC has kept the key interest rate at 0.25 per cent, and announced recently they will maintain that price. However, they have signalled potential increases in 2022.
Poloz said that with the Canadian economy trending in the right direction and “mostly back to normal,” raising the key benchmark rate is something that should be considered, albeit not right away.
“It is time for everything to normalize — prices, interest rates, all those things,” said Poloz. “It’s no longer necessary to have really, really low interest rates.”
Poloz added that the data that comes out regarding inflation and the continued COVD-19 economic recovery should serve as the driving points to where the key benchmark rate will end up.