Inflation may have been limited if COVID-19 stimulus lifted earlier: Bank of Canada – National

Bank of Canada Lieutenant Governor Paul Beaudry said in retrospect that governments and central banks should have withdrawn stimulus measures sooner as economies recovered from the crisis. COVID-19 pandemic, which would likely have kept a check on inflation.

In a speech at the University of Waterloo on Tuesday, Beaudry said a faster global withdrawal of fiscal and monetary stimulus during the recovery from the pandemic would likely have resulted in lower inflation.

Beaudry said that the fiscal and monetary policy of one country has spillover effects on other nations that are not always taken into account.

He said that one of the lessons from the 2008-2009 global financial crisis was that countries would have benefited from a more gradual withdrawal of stimulus due to spillover effects.

Read more:

Inflation slowed by lower gas prices in August, but food costs continue to rise

Story continues below ad

This lesson, he said, influenced political decisions during the pandemic. However, Beaudry pointed out that the economic crisis of COVID-19 was different and that public health measures meant that supply in many sectors could not be kept up as demand began to recover.

“Bottlenecks occurred in these sectors due to surges in demand driven by a combination of stimulus policies, closures and reopenings, as well as consumer abandonment of services.”

The lieutenant governor said the stimulus delivered simultaneously by countries through government support programs and lower interest rates had spillover effects globally and contributed to supply chain bottlenecks.

“It is likely that a somewhat faster global withdrawal process could have improved the situation of all countries,” he said.

Click to play video: 'Rising Cost of Food Affects the Way Canadians Shop'

Rising cost of food affects how Canadians shop

Rising cost of food affects how Canadians shop

At the same time, Beaudry said the stimulus measures contributed to a faster-than-expected recovery in the economy, with labor markets recovering six months earlier than after the global financial crisis.

Story continues below ad

“Fiscal policy measures clearly prevented a worse outcome.”

Going forward, Beaudry said the Bank of Canada is focused on clear communications with the public about its policy decisions to ensure Canadians don’t expect high inflation to persist for long.

Central banks are generally concerned when people and businesses expect inflation to stay high because those expectations can lead to even higher prices.

Read more:

What is ‘core inflation’? This key figure could measure future interest rate hikes

Beaudry also addressed concerns raised by some that the central bank would need to engineer a substantial economic slowdown, or even a recession, to bring down inflation.

Beaudry said the Bank of Canada believes that people set their inflation expectations partly based on past inflation and partly based on communication from central banks about where monetary policy is headed.

Statistics Canada released its Consumer Price Index report for August on Tuesday, which showed inflation slowed to 7.0 percent. Beaudry said that while inflation is heading in the right direction, it is still “too high.”

Click to Play Video: 'Canada's Affordability Plan Won't Help Rise Inflation: Boissonnault'

Canada’s affordability plan won’t contribute to rising inflation: Boissonnault

Canada’s affordability plan won’t contribute to rising inflation: Boissonnault

The lieutenant governor said the bank is leaning toward effective communication with the public about monetary policy to help alleviate some of the growing concern over persistent inflation.

Story continues below ad

“The bank is committed to keeping its communications clear, simple and focused on our inflation mandate during this difficult period,” he said, adding that the more effective the bank is with its communications, the more likely a recession can be avoided.

The lieutenant governor concluded by reiterating the bank’s commitment to bring inflation to its goal of two percent and thus fulfill his mandate.

“We will continue to take the necessary steps to restore price stability for households and businesses.”

© 2022 The Canadian Press

Leave a Reply

Your email address will not be published.