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--Rebuts Arguments Central Banks Losing Control Of Inflation
By Courtney Tower
OTTAWA (MNI) - Persistently low inflation in Canada will continue
"until all slack in the labour market is absorbed," Bank of Canada
Governor Stephen Poloz said Tuesday.
This continuing drag on inflation - slack in full employment and
thus delay in reaching full economic capacity - remains fundamental to
understanding inflation beyond all new arguments offered such as
globalization and digitalization, he said.
Poloz vigorously took on, before the Montreal Council on Foreign
Relations and financial analysts, arguments in some quarters that
central banks no longer can target inflation effectively because these
new factors escape their models.
He noted that some "question whether central banks can still target
inflation effectively," and said "this is not the case." Indeed, "we
know how inflation works - the laws of supply and demand have not been
Poloz emphasized that "the underlying trend in inflation is well
within the target range (1%-3%) we have committed to."
While it is "common sense" to believe that globalization and the
increasing digitalization of social and economic life in the world do
affect prices, they as yet appear to be too small to have much
statistical influence, he said. Bank of Canada research is underway into
Inflation has operated below forecasts largely because many
economies still are not fully recovered from the global recession of
nearly a decade ago, still halve have excess supply, Poloz said. And
inflation goes up when excess supply turns into excess demand, with a
Other factors are transitory, or one-off, while there "is still a
link between labor market slack and wages (growing slowly in Canada and
the world), just as there is still a link between inflation and the
balance of total supply and demand," Poloz said
"What this means is that the closer we get to full output and
employment, the greater risk that inflation pressures will appear."
The Bank of Canada has predicted that headline inflation, now
running at 1.6%, will continue to rise through the second half of 2018
to the desired 2.0% target.
The Bank said in its recent Monetary Policy Report that the economy
is operating at "close to its potential." The slack remaining in the
labor market can lead to higher economic growth than the Bank is
projecting "without inflation rising materially above target," the BOC's
Poloz repeated his earlier cautions about future changes in the
1.0% policy interest rate.
He said the Bank would be watching wage growth and inflation, and
the sensitivity of the economy to higher interest rates. These were
among "lots of pieces (that) need to fall into place before we can be
certain that the economy has made it all the way home."
** MNI OTTAWA **
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