According to a senior official, Bank of Canada policy makers are not worried about the recent run up of inflation as they believe is being largely driven by temporary factors.
The move on the Canadian inflation to above 3% was one of the key issues discussed by policy makers this week, deputy governor Tim Lane said in a speech Wednesday after the decision by the central bank to follow the Stand-alone settlement agreement.
Officials agreed that higher-than-expected inflation is largely due to unfavorable year-ago comparisons on Thursday, Lane said, with continued excess supply expected to put downward pressure on prices once the base effects abate.
From definitions, these upper-year effects will not persist beyond the next few months, Lane said in prepared remarks. What will persist until we see a complete recovery is the underlying slack in the economy.
This slack will continue to put downward pressure on inflation as the base year effects fade, he said.
Lane's speech is an attempt to brush off worries about faster inflation that could prompt Canadians and investors to anticipate an accelerated exit from monetary policies of limited duration. In April, illiquid inflation in Canada has already hit 3.4% and the deputy governor said that the central bank expects it to continue around 3% over the next few months before moderating.
On Thursday, the U.S. posted a higher-than expected 5% annual inflation for May than expected. Economists there are also shrugging it off as a result of the temporary supply chain pressures in the aftermath of the pandemic.
The Bank of Canada kept its historical interest rate at a current low and the past pace of bond purchases this week in what is considered a placeholder decision that left hopes intact for another reduction in stimulus next month.
The central bank was among the first from advanced economies to decongest a less expansionary policy in April when it reduced the timetable for a possible rate increase and accelerated bond purchases. Another taper is expected at the Bank of Canada's decision on July 14, after another tampering with the Bank of Canada's decision.
Lane reiterated language in Wednesday's statement that indicated the Bank of Canada is optimistic about the near-term outlook, despite some weak data in recent months because of a spate of lockdowns.
He said that the economy is on track to rebound largely, as was expected when the Bank of Canada released its quarterly projections in April.
Lane even acknowledged - in some length - there was a risk of persistent cost pressures that the central bank will need to monitor closely. These could include lower prices for raw materials or supply chain disruptions.
At the same time, there is a good chance that productivity gains will help the economy grow more than expected without fueling inflation, he said.
Lane discussed ways that the pandemic is accelerating a digital transformation in the country, allowing people to work and shop remotely. This shift towards technology also has implications for economy policy, as it made the country more resilient to the pandemic lock downs.
Like all of these recessions, Lane said Thursday that 'There is no doubt that the pandemic will bring in lost capacity and scarring. The accelerated digital transformation has supported resilience so much that we now think the damages to potential will be less than we previously feared.
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