Deputy Governor Paul Beaudry said Tuesday the Bank of Canada remains in an "ongoing battle" to bring inflation back to its 2% target, speaking hours after the latest report showed price gains slowed for a second month and by more than most economists expected.
"While we’re headed in the right direction, that’s still too high. Consumers and businesses are rightfully wondering when we’ll stop feeling the pinch of high prices," Beaudry said. Statistics Canada reported earlier inflation slowed to 7% in August from 7.6% in July and June's four-decade high of 8.1%. Several economists after the CPI figures affirmed their view the BOC will hike the 3.25% policy rate another half point at its October meeting.
The inflation surge has "seriously tested" the Bank's credibility under targets introduced in 1991 and a clear message about bringing CPI back to target is needed to anchor expectations, Beaudry said in remarks prepared for a lecture at the University of Waterloo. The speech didn't include a direct reiteration of the last rate decision saying higher interest rates will be needed, or the pending discussion of a potential terminal rate.
The pandemic and Ukraine war "are contributing to inflation levels well above our target while also raising short- and medium-term inflation expectations," he said. "Monetary policy is actively tightening to cool the economy and contain these pressures."
Beaudry downplayed both the idea that Canada is entering a wage-price spiral, as some ex-advisers have argued, and the need for a recession to subdue inflation. Policy makers will pay close attention to the balance sheets of governments and the private sector and the strength of the job market to help figure out how this economic rebound differs from past experience, he said.
"The Bank is committed to keeping its communications during this difficult period clear, simple and focused on our inflation mandate," he said. "The more effective the Bank can be in its guiding role, the greater the chance of a soft landing -- and the lower the risk of a hard landing."
Much of the speech reviewed lessons learned after officials around the world misread the inflation surge through the economic rebound from Covid. Officials relied on the view that stimulus was pulled away too fast after the 2008 Global Financial Crisis and underestimated how massive supports across so many economies during the pandemic would lay a path for a rapid recovery, Beaudry suggested. Also overlooked was evidence that tight supply chains following pandemic shutdowns would add to inflation pressure, he said. At the same time, strong action was important in preventing a much deeper and long-lasting downturn, he said.
"This allowed the Canadian and other economies to bypass many of the pain points that often follow recessions -- setting the scene for a historic bounce back in labour markets," Beaudry said.
The task ahead is much different, he said. "Most importantly, we will continue to take whatever actions are necessary to restore price stability for households and businesses and to maintain Canadians’ confidence that we can deliver on our mandate of bringing inflation back to 2%."