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Bank of Canada Deputy Governor Tim Lane said Thursday that while inflation over the next several months will be faster than expected and may breach the top of the central bank's target band of 3%, the pressure is transitory.
Slack in the economy will slow things down later this year, Lane said in the text of a speech, though over the next few months CPI gains will exceed the BOC's April projection, which called for a 2.9% average in the second quarter. The remarks came hours after the U.S. reported 5% CPI inflation for May, and Fed officials have also called such pressures temporary.
"The underlying story is the same," on inflation, Lane said. "Most of the run-up in inflation is simply arithmetic -- base-year effects," and "we expect it to stay around 3 percent over the next several months, before moderating."
"What will persist until we see a complete recovery is the underlying slack in the economy. This slack will continue to put downward pressure on inflation as these base-year effects fade," Lane said. He didn't define where inflation will top out, or when it will fade towards the middle of the 1% to 3% target range.
Canada's CPI gained 3.4% in April from a year ago, the fastest in a decade, and after adjusting for new spending patterns in the pandemic may really be about 4%, MNI's reporting on Statistics Canada's overhaul suggests.
The speech laid out most of the same policy messages around Wednesday's decision to hold a record low 0.25% interest rate until the second half of next year when inflation stabilizes around 2%, and to look at further tapering QE as the rebound builds. Lane provided more detail on why the Bank remains confident after GDP slowed in the first quarter and shrank in April amid fresh Covid lockdowns, saying part of the slowdown reflects confident consumers boosting imports and firms drawing down inventories.
"With Canada's vaccinations now in high gear and lockdown measures helping to contain the virus, this setback should be temporary," Lane said. "Data that have come in over the past few weeks provide signs of increasing resilience that bode well for the underlying recovery."
Investors have told MNI that view of a solid rebound keeps another QE taper from today's CAD3 billion weekly pace in play for the next meeting in July.
The BOC is relying on a wider set of data than usual to assess the pandemic rebound including on the labor market, and more detail on that will come in the July economic forecast paper, Lane said. Canada's employment rate for example remains below where it had been before the pandemic and there are weaknesses among close-contact services and for women and minorities, he said.
"We can start to imagine better times. But we are still a long way from a complete economic recovery. Too many people remain out of work, particularly in the sectors hit hardest by lockdowns," Lane said.
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