Stephen Poloz said he believed 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, said Stephen Poloz, that 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.
Stephen 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, it takes hold and stays there, to some extent,” said Stephen Poloz. 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.
Last Thursday in Banff, Stephen 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,” said Stephen Poloz. You won’t really know until you feel the wheels touch the ground, and you hope it’s smooth. »