MNI BRIEF: BOC Is Entering Normalisation Phase-Ex-Gov Poloz

The Bank of Canada is entering a normalisation phase with unemployment back to pre-pandemic levels and inflation faster than expected, according to Stephen Poloz, the former governor who slashed rates near zero and launched QE early in the pandemic before his term expired.

"The next phase clearly is the normalisation of those policies as both the Fed and the Bank of Canada have made clear. So that normalisation process, I don't know exactly how it is going to unfold, but for sure, it is the next phase of this recovery,” Poloz said in a talk at Western University, his alma mater. His comments come in a week where some investors have advanced bets for a rate hike from April to the decision next Wednesday.

Tightening depends on how the economy progresses with a focus on the hit to indebted households and governments, he said. “The economy may react differently than in the past because of the high levels of debt,” he said.

While the jump in inflation to a three-decade high of 4.8% has become "public concern number one," some of the conversation "has been pretty misleading,” he said. “At the point we're at now it' is certainly not as bad as it looks."

Some increases reflect an economy rebounding after most prices tumbled early in the pandemic, and wage growth has been more like 2.5% after filtering out the effect of a downturn that hammered some lower-paying industries, he said. “I'm among a lot of others that think that inflation is going to ease quite a lot this year for these mechanical reasons,” Poloz said.

“There are risks there that inflation could pick up over time. But there are some things on the other side you have to remember too," Poloz said.

"Economic capacity is for sure expanding as we sit here, immigration is picking up,” he said. “Supply chain issues are being resolved, and investment in new capacity by firms really is picking up so supply can outpace demand over the next number of quarters.”