Former BoC governor warns against high inflation expectations
Poloz said he believes the current cycle of high inflation is transitory, pointing to the latest monthly reading from Statistics Canada showing inflation is already beginning to ease.
Preventing current high inflation levels from becoming embedded into the public’s expectations is key if the country is to avoid falling into recession, former Bank of Canada governor Stephen Poloz said on Sep. 22.
Poloz, who was head of the bank for seven years until his term expired in June of 2020, made the comments during an interview in Banff, Alta., where he was a speaker at the Global Business Forum, an annual conference that attracts executives and business leaders from around the world.
Poloz said he believes the current cycle of high inflation is transitory, pointing to the latest monthly reading from Statistics Canada showing inflation is already beginning to ease — in spite of the fact, Poloz said, that interest rate hikes already implemented by central bankers have barely had time to have an effect.
“It means it (inflation) is going to go away more or less by itself in time. But if it takes one year for it to climb up, it has to take a full year for it to flatten and another full year for it to go away,” Poloz said.
He said it’s possible inflation could return to the Bank of Canada’s target rate of two per cent without a severe or even a mild recession. He pointed out the Canadian economy is in a strong position, with a strong labour market, high levels of income and household savings, and encouraging levels of corporate investment.
However, he also said there’s no guarantee of a soft landing. A major geopolitical event that causes a dramatic spike in the price of oil, for example, could cause a recession all on its own regardless of interest rates or any other factor.
Poloz said one of the biggest risks is actually the public’s expectations. If people become convinced that high inflation is here to stay, he said, that could lead to higher wage settlements that are difficult to reverse.
Spiralling wages in turn could drive inflation even higher, forcing the need for a more difficult economic contraction to get the cost of living under control.
Earlier this month, the Bank of Canada raised its own key interest rate by three-quarters of a percentage point and signalled this won’t be the last increase as it continues its battle against high inflation.
In Banff on Sep. 22, Poloz said no one truly knows what is going to happen as central bankers around the world look to downshift from an overheated economy.
“It’s like landing a plane in the fog,” Poloz said. “You won’t really know until you feel the wheels touch down, and you’re hoping it’s going to be soft.”