Former Bank of Canada Governor Stephen Poloz believes the central bank can rein in sky-high inflation without crushing economic growth, as long as Tiff Macklem and company act with skill.
In an interview on Thursday, Poloz – now a special adviser to law firm Osler – said that while there will be painful side effects in the fight against inflation, a combination of prudent policy and consideration of the effects inflationary pressures from the war in Ukraine, could lead to a scenario where price pressures continue to ease without plunging the national economy deeply.
“It would be nonsense to smash inflation to 2% immediately because some of it will go away on its own, obviously it would be nonsense to just ignore it and hope for the best,” he said. he declared. “So somewhere in the middle is this sort of stagflationary path of this, of that, and there’s no painless way to get there because what happened in Ukraine.”
Inflation has moderated from its June peak of 8.1% year-on-year; it reached a pace of 6.9% in September, more than three times the Bank of Canada’s 2% target.
Much of the decline was due to moderating gas prices, with the average of the three core measures – which strip out volatile items like gas and groceries – holding steady at 5.3% over the course of the year. of the month.
Digging deeper, grocery store prices rose 11.4% in September, the fastest pace since 1981.
As Canadians have adjusted their spending habits – the Bank of Canada’s latest survey of consumer expectations showed that more than 80% of Canadians are taking action to deal with higher inflation – Poloz said d Other factors come into play when it comes to adjusting their behavior in a way that should turn out to be disinflationary.
“There are certain mechanisms affecting inflation that people don’t really talk about, such as the decline in disposable income people have. Results from Walmart – they had a lot less stuff in the basket,” he said.
“What is Walmart’s response? They will slash prices: that’s what disinflation looks like, it’s not about crushing the economy. So I think we have a lot of those prerequisites there that help.
The prospect of more outsized rate hikes has led to a growing chorus of calls that Canada will enter a recession next year. Earlier this week, Scotiabank said it expects a technical recession – two straight quarters of negative economic growth – in 2023, and the Bank of Canada will eventually have to raise rates by another percentage point. by the end of the year.
Although Poloz admitted that a recession of some type is the most likely outcome for the national economy, he said the underlying strength of the labor market should soften the blow and ensure that a such a drop in economic activity looks more like an adjustment to more normalized conditions. .
“It seems like [like a recession] where we are sitting, but that is not necessarily the case: I have to admit that there is a gray area here. I’m thinking more of an altitude adjustment: the plane climbed to 40,000 feet by mistake, we were really supposed to be at 35,000 feet – too much turbulence here,” he said.
“So let’s level it to a sustainable altitude of 35,000 feet. Do we have to go down to 30 for a while to come back to 35? Maybe, but it won’t really look like a recession if that’s what happens: the labor market is super strong, the economy is strong.
Although central banks around the world are walking a tightrope as the pandemic recedes, Poloz said from his perspective, policymakers are largely doing a good job.
“They’re on the right track, they’re doing the right thing, or of course they are. We just don’t know – anyone, including them – when we’ll actually get there. It will be a real-time discovery. ”
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