BOC's Poloz:Low Inflation To Persist Until Labor Slack Removed>

--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 

repealed." 

     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 

these effects. 

     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 

lag. 

     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 

report said. 

     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 **