Lower economic growth necessary to bring inflation down: BoC senior deputy governor

Senior Deputy Governor of the Bank of Canada Carolyn Rogers speaks at a press conference in Ottawa on Thursday, June 9, 2022. THE CANADIAN PRESS/ Patrick Doyle

Bank of Canada senior deputy governor Carolyn Rogers says the journey back to two per cent inflation will take time and a that period of lower economic growth is necessary to bring inflation down.

The Thursday speech to Calgary Economic Development comes one day after the Bank of Canada raised its key interest rate by three-quarters of a percentage point and indicated higher interest rates are on the way.

According to the prepared remarks, Rogers says yesterday’s decision was based on concern from the governing council about the risk of inflation becoming “entrenched.”

Canada’s year-over-year inflation rate was 7.6 per cent in July, easing from 8.1 per cent in June as gas prices fell.

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However, Rogers says the governing council’s concern stems from the bank’s core measures of inflation, which tend to be less volatile. That indicator moved up in July, which “shows how strong underlying inflation remains,” while inflation expectations remain high.

Central banks tend to worry when people and businesses expect inflation to remain high because it can lead to a self-fulfilling prophecy. Businesses that expect high inflation will set future prices higher while workers will negotiate future wage increases to match up with their expectations of inflation.

“We want to ensure this scenario does not materialize because if it does the economic cost of restoring price stability will be much higher,” Rogers said.

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In a news conference with journalists later on Thursday, Rogers said the bank still sees a path to a “soft landing,” where higher interest rates bring inflation down without triggering a serious economic downturn.

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“We think there is room in the economy to cool it and stay in positive growth territory,” Rogers said.

Rogers also responded to a question about the risk of a wage-price spiral, where higher prices feed into higher wages and vice versa, and said the upward pressure on prices amid a labour shortage and rising cost of living is understandable.

Governor Tiff Macklem received backlash from labour leaders after telling businesses at an event hosted by the Canadian Federation of Independent Business to not build high inflation into wage contracts.

“Workers are looking at the rate of inflation and what it’s doing to their purchasing power, their budgets, and they’re looking at the same tight labour markets and they’re thinking, you know, I need a raise. This is also completely understandable,” said Rogers.

“It’s not our job to provide advice on wage or price setting.”

Rogers said the bank’s intention is to highlight the risk of Canadians looking at high inflation today and incorporating it into long-term decision-making, which could lead to inflation remaining high for a longer period of time.

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In her speech, Rogers outlined the bank’s assessment of the domestic and global economies. Rogers says global supply challenges and elevated commodity prices along with an overheated Canadian economy continue to put upward pressure on prices.

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“Because we are in a period of excess demand, we need a period of slower growth to balance things out and bring demand back in line with supply,” Rogers said.

The senior deputy governor says the bank will continue to monitor how the economy is responding to higher interest rates as well as global economic developments and assess how much higher interest rates need to go.

Rogers says higher inflation and interest rates should lower consumer spending, but extra savings accumulated during the pandemic may cushion household budgets.

“We know Canadians have accumulated extra savings during the pandemic, so there is a risk that consumer spending has more momentum than we expect, making inflation more persistent,” she said.

Rogers warns that the bank’s decisions now and in recent months will take up to two years to have their full effect on inflation.

“Getting inflation all the way back to two per cent will take some time. We also know there could be bumps along the way,” Rogers said.

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In her speech, Rogers also acknowledged the effect of high inflation on both people and businesses. For Canadians, the cost of daily necessities is going up, while for businesses, uncertainty caused by higher inflation can affect investment decisions, Rogers said.

“It is impossible to escape the frustration and stress that inflation brings — especially for those living on lower or fixed incomes,” she said.

Rogers concluded her speech by doubling down on the bank’s commitment to bring inflation down.

“We are determined to get this job done,” she said.

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