MNI INTERVIEW: BOC's Macklem Says Slack To Hold Down Inflation

Bank of Canada Governor Tiff Macklem is more concerned by low inflation in an economy with ample slack than by market bets on surging prices, he told MNI, adding that it might be time to adjust the country's three-decade-old inflation-targeting framework.

Shorter-term debt yields and inflation expectations have been well anchored, in part reflecting forward guidance that the policy interest rate could stay at 0.25% into 2023, Macklem said during a video interview from his office late Tuesday.

"I'm confident we have the tools to control inflation. We're more worried about inflation being too low than too high," Macklem said. "If you saw inflation expectations starting to go way up well above target, that would be a different story. But that's not what we've seen."

"The other thing we're looking at is what's happening at the short end on the horizon over which we've provided forward guidance, and we're seeing rates are very well anchored at the short end," he said. Canada's two-year government bond traded at 0.23% Tuesday.

There will be a mechanical rise in consumer prices in the next few months following last year's weakness in products like gasoline, but economic slack should pull prices back below the 2% target later on, he said. "There are a lot of lost incomes, that's going to continue to put downward pressure on inflation. So as you move beyond that big base-year effect we expect inflation is going to sink back down in the lower part of our 1 to 3% range, before it gets sustainably back to 2%. In our own forecast that's into 2023."

The governor said around a speech earlier on Tuesday that history shows inflation doesn't necessarily get out of hand even with unemployment around record lows, and rising yields partly reflect confidence in vaccines and stimulus underpinning an economic rebound.

MORE ROOM THAN THOUGHT

"The lesson from the past is that if you don't see much pressure of inflation, there may be more space to grow than you might have thought," Macklem elaborated in the interview. "We're not going to forget before the pandemic there was certainly some evidence that there was more flexibility, more space for the economy to grow without inflation."

"At the beginning of this pandemic you saw inflation expectations fall, and that was really a sign that there was genuine concern about deflation," Macklem said. "This increased confidence is a good thing and certainly our own forecast has really quite strong growth through the second half of this year, in the first half of next year."

The central bank later this year is due to update its five-year agreement with the government to set a 2% inflation target. Macklem said the system "has served Canada very well but we're always looking to improve it and particularly this time" as the system is now three decades old, he said. "Canada being the second country in the world to launch inflation targeting, it was time for a more thorough review."

Other priorities include accelerating work on central bank digital currencies, giving the BOC a bigger voice at the global level, diversity and inclusion in staff ranks, incorporating climate change into policy work, and being more relatable to the public, Macklem said.

"We're still dealing with an unprecedented shock. And I'll come back to where I started, I mean, we are completely focused on getting inflation back to target supporting the recovery," he said.

Global progress in vaccines has made him more optimistic over prospects for an end to pandemic conditions than six months ago, he said.