Bank of Canada Governor Tiff Macklem stood by the central bank’s use of inflation targeting, saying that the national financial system’s recovery hinges on the majority of Canadians getting back to work.
“The message I want to leave you with is that while we are using different tools in these extraordinary times, our policy remains grounded in the same framework,” Macklem said in his first speech as BoC governor. “The inflation target is our beacon that is guiding our actions as we help bring the economy from crisis, through reopening, to recuperation and recovery.”
The step is necessary due to the risk of the COVID-19 pandemic’s economic impact lasting beyond the crisis, Macklem said.
“The recovery will likely be prolonged and bumpy, with the potential for setbacks along the way,” Macklem said. “If, as we expect, supply is restored more quickly than demand, this could lead to a large gap between the two, putting a lot of downward pressure on inflation.”
The bank will be keeping the policy rate at the effective lower bound of 0.25%, CMT reported.
“Some central banks have taken their policy rates below zero. We feel that bringing that rate into negative territory could lead to distortions in the behaviour of financial institutions,” Macklem said. “However, the bank has a number of other tools we can use to help stimulate demand.”