Canada’s central bank is not worried that people will expect very low inflation to continue because it has repeatedly fallen short of the Bank of Canada’s 2% target, governor Stephen Poloz said on November 7.
“As a central banker you always concern yourself with...the risk that expectations will gravitate towards the actual experience instead of to the target itself,” he told The Canadian Press after discussing inflation with a Montreal business audience.
But he noted that there is no evidence of a “de-anchoring” of expectations, saying all of the bank’s surveys suggest a strong knowledge about the 2% target established 25 years ago following a period of high and volatile inflation and interest rates.
While the bank has an inflation target range of between 1% and 3%, Poloz isn’t overly concerned if it dips below or rises above the midway point. He said many advanced economies have faced a similar trend.
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In a luncheon speech to CFA Montreal and the Montreal Council on Foreign Relations, Poloz said the fundamental drivers of supply and demand, as well as short-term factors, can explain the movement in prices and that the popular perception that inflation has become inexplicable is exaggerated.
“In part this perception reflects a misunderstanding of the accuracy with which economists can predict inflation and a misunderstanding of the precision with which central banks can control it,” he told an audience of 1,000.
Inflation in Canada slowed over the first half of this year and remained in the lower half of the Bank of Canada’s target range even as the economy grew quickly.
The Bank of Canada is aiming to keep inflation at 2% by making changes to its key interest rate target. Poloz said it would take 18 to 24 months for a change in interest rate policy to have its full impact on inflation.
In keeping the rate on hold last month, the Bank of Canada said less monetary policy stimulus will likely be required over time, but that it will be cautious in making future adjustments to the policy rate and be guided by the incoming economic data.
“A lot of pieces need to fall into place before we can be certain that the economy has made it all the way home,” Poloz said.
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