Former Bank of Canada Governor Stephen Poloz believes that as long as Tiff Macklem and company exercise tactful tact, there is a way for the central bank to curb skyrocketing inflation without destroying economic growth.
In an interview on Thursday, Poloz – now a special counsel at the Osler law firm – said that while there will be some painful side effects from the inflation war, a combination of prudent policies and accommodating the temporary inflationary effects of the war in Ukraine could mean that the price pressure will continue to ease without the domestic economy faltering.
“It would be nonsense to immediately push inflation down to 2% because some of that will go away on its own. Obviously it would be nonsense to just ignore them and hope for the best,” he said. “So somewhere in the middle is this kind of stagflationary, some of that, some of that way, and there’s no painless way to get there because of what happened in Ukraine.”
Inflation has eased from a June high of 8.1 percent yoy; it ran at 6.9 percent in September — more than triple the Bank of Canada’s two percent target.
Most of the decline was due to moderate gasoline prices, with the average of the three core measures — which exclude volatile items like gasoline and groceries — remaining steady at 5.3 percent for the month.
Digging deeper, food prices rose 11.4 percent in September, the fastest pace since 1981.
While Canadians have adjusted their spending habits — the Bank of Canada’s latest Consumer Expectations Survey found more than 80 percent of Canadians are taking action to cope with higher inflation — Poloz said other factors are at play when it’s about companies adjusting their spending behavior in a way that should prove disinflationary.
“There are some mechanisms that affect inflation that people don’t really talk about, like how much less disposable income people have. Walmart results – they had a lot less stuff in the basket,” he said.
“What’s Walmart’s response? They will drop prices drastically: This is what disinflation looks like, it’s not about destroying the economy. So I think we have a lot of those conditions there that help.”
The prospect of further 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 that the Bank of Canada will ultimately need to hike rates by another full percentage point by year-end.
While Poloz conceded that a recession of some sort was the most likely outcome for the domestic economy, he said underlying strength in the labor market should cushion the blow and make such a drop in economic activity appear more like an adjustment to normalized conditions.
“It looks [like a recession] where we’re sitting from, but that’s not necessarily the case: I have to admit that there’s a gray area. I see it more as an altitude adjustment: the plane went up to 40,000 feet by mistake, we were supposed to be at 35,000 feet – too much turbulence up 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 get back to 35? Possibly, but it won’t feel like a recession when that happens: the job market is super strong, the economy is strong.”
While central banks around the world are walking a tightrope as the pandemic abates, Poloz said, in his view, policymakers are largely doing a good job.
“They are on the right track, they are doing the right thing, or of course they are. We just don’t know – nobody, including her – when we’ll actually get there. It will be a real-time discovery. ”
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