MNI INTERVIEW: BOC Review To Keep Inflation Target- Ex Adviser

Price pressures will continue to be manageable as the Canadian economy rebounds from the pandemic, allowing the Bank of Canada to leave its monetary policy framework little changed when it comes up for review and avoid following the Fed in adopting a "loosey-goosey" inflation-averaging goal, former BOC adviser Steve Ambler told MNI.

"There is some possibility" of an inflation surge when pent-up demand meets supply bottlenecks as the economy revs up again, but "I'm not sure that it's likely," he said.

Low interest rates amid political pressure to delay raising the 0.25% policy rate in the next few years as the government faces record deficits and debt will help support prices, said the retired professor of economics at l'Universite du Quebec a Montreal who also served as a former BOC special adviser in 2007 and helps lead the C.D. Howe think tank's shadow monetary council.

With inflation set to stay modest, policy makers will likely stick with their 2% target when they renew their mandate with the government this year, he said. Over-reaching in a new agreement to boost inflation, such as targeting nominal GDP or full employment, may be difficult to pull off and draw policy makers away from their main objective of price stability, he said.

SUPPLY CHAIN CONFUSION

Evidence that Canada's economic potential has been hammered by the pandemic is another reason for caution, Ambler suggested. While the economy has a lot of spare capacity, damaged supply chains and pent-up demand unleashed after lockdowns could drive up prices.

"It's really done a number on supply on the supply side," he said. "It's not that clear to me how much slack there is in the economy. You do have unemployed people, but some of those people are in sectors that may have been damaged permanently by the pandemic."

That cloud over the job market makes it difficult for Canada to emulate New Zealand and the U.S. with a more explicit full employment target, Ambler said. "That would be very dangerous, because the danger would be of picking an unemployment number that was so low that it would be inflationary."

LOOSEY-GOOSEY OVERSHOOT

Ambler agreed with the recent assessment from BOC Deputy Larry Schembri that gradual changes to inflation targeting may be best, given the absence of a clear alternative to a regime in place since the 1990s and a target Canada has met better than other major central banks.

"Inertia is going to wind up dominating," Ambler said. "This time, they're going to say, well, things are really uncertain, because it's a new type of type of shock, so now is not the time to make major changes. That's my prediction."