(Banff) Preventing the current high levels of inflation from integrating into public expectations is essential if the country is to avoid falling into recession, former Bank of Canada Governor Stephen Poloz said Thursday.
Poloz, who served as central banker for seven years until his term expired in June 2020, made the comments during an interview in Banff, Alta., where he was a guest speaker. at the Global Business Forum, an annual conference that attracts executives and business leaders from around the world.
Mr. Poloz said he believes the current cycle of high inflation is transitory, pointing to the latest monthly reading from Statistics Canada showing that inflation was already starting to subside — despite the fact, Mr. Poloz said, that the interest rate hikes already implemented by central bankers have barely had time to take effect.
“That means it (inflation) is going to go away more or less on its own over time. But if it takes a year for it to climb, it takes a full year for it to flatten out and another full year for it to disappear,” he said.
He said it’s possible inflation could return to the Bank of Canada’s 2% target rate without a severe or even mild recession. He noted that the Canadian economy is in a strong position, with a strong labor market, high levels of household income and savings, and encouraging levels of business investment.
However, he also said there was no guarantee of a soft landing. A major geopolitical event that causes a dramatic spike in the price of oil, for example, could on its own cause a recession, regardless of interest rates or any other factor.
Mr. Poloz said one of the biggest risks is actually public expectations. If people become convinced that high inflation is here to stay, he said, it could lead to higher wage deals that are hard to reverse.
Soaring wages could in turn lead to even higher inflation, forcing a harder economic contraction to keep the cost of living under control.
“The risk is that (inflation) infects our economy, takes hold and stays there, to some extent,” Poloz said. Of course, it would never be close to 100%, but it could be significant. »
Earlier this month, the Bank of Canada raised its key interest rate by three-quarters of a percentage point and signaled that it would not be the last hike as it continues its fight against high inflation.
In Banff on Thursday, Poloz said no one really knew what was going to happen as central bankers around the world seek to downgrade an overheated economy.
“It’s like landing a plane in fog,” Poloz said. You won’t really know until you feel the wheels touch the ground, and you hope it’s smooth. »
– With information from The Associated Press