MNI: BOC Says It Can Be 'Forceful' Against Inflation If Needed

Bank of Canada Deputy Governor Tim Lane said Wednesday that the pandemic could still bring fresh surprises and policymakers can be "forceful" if needed against the potential for more persistent inflation.

“While we now expect supply disruptions to ease and inflation to come down quickly in the second half of this year, we are alert to the risk that inflation may again prove more persistent," Lane said in the text of a speech. "We will be nimble -- and if necessary, forceful -- in using our monetary policy tools to address whatever situation arises, as we have done throughout these turbulent times.”

“The pandemic has brought much that was unexpected. We have drawn on our analysis and experience to reach a clearer understanding of the forces at work, but we must anticipate the possibility of more surprises before this chapter is closed,” Lane said.

Investors and economists see the Bank hiking the record low 0.25% policy rate by a quarter point at its next meeting March 2 and several more times this year. Lane's speech repeated the January view that monetary policy is shifting to a path of tightening to bring down uncomfortably high inflation.

While inflation and the economy have progressed more than expected, "the economy is still not back to normal," Lane said.

"Currently, with inflation well above our target, we are increasingly focused on countering the upside risks," he said. Earlier Wednesday Statistics Canada said inflation reached 5.1% in January, the fastest since 1991 when the Bank adopted inflation targets, and policymakers say inflation will remain around that point through the first half of this year.

His comments come as global investors speculate about the potential for the Fed to hike half a point next month, and some BOE members recently voted for such a move. BOC Governor Tiff Macklem last year downplayed the potential for a half-point hike when asked by MNI about it at a press conference, reminding that the downturn was sharp and swift while the recovery has been more hesitant. The BOC made three 50bp rate cuts in March 2020 as the pandemic emerged.

Part of Lane's speech was also a reminder that today’s inflation gains are a byproduct of the strong policy action brought in to keep the pandemic from becoming an economic nightmare. “Uncertainty may require a cautious and gradual approach when entering uncharted territory -- but as the pandemic has illustrated, there are times when policy-makers must act boldly,” Lane said.

Inflation was underestimated in part because of a view that demand would be sluggish following lockdowns as it was after the global financial crisis, and because supply bottlenecks were seen as short-lived, Lane said. The rapid rollout of vaccines and a quick shift in work habits also added economic upside, he said.