MNI POLICY: BOC: Covid Distorts CPI, Economy Faces Lasting Hit

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada said the consumer price index anchoring

its mandate has likely overestimated the extent of falling prices amid Covid-19,

and policymakers must focus on the potential for longer-term weakness in an

economy facing permanent damage.

     In the short run, consumer inflation has likely declined less than

indicated by the CPI report, Deputy Governor Tim Lane said in the text of a

speech Wednesday. Statistics Canada today said CPI fell 0.2% in April from a

year earlier, the first such decline since 2009 and well outside the BOC's 1%-3%

target range. 

     "In this setting, monetary policy needs to be even more forward looking

than usual, seeing beyond the shutdown to its potential implications for the

subsequent recovery," Lane said. The balance of risks to inflation is downward,

he said.

     The recovery will be hobbled as some industries need more time to adapt to

new health restrictions and consumers may shy away from some activities, Lane

said. The country's exporters and oil industries also had struggles before the

pandemic that will be hard to overcome now.

     "There are many possible paths to economic recovery," Lane said. "The

impacts of the pandemic may be far-reaching, and the effects on some sectors

could be permanent."

     "While the steps we have taken should help, we are likely to emerge from

the shutdown with both demand and supply weaker than before," Lane said. The BOC

has cut interest rates to about zero and swollen its balance sheet to a record

to keep financial markets working.

     Other speech highlights:

- "Both business and consumer confidence may also remain depressed, partly

reflecting uncertainty related to a second wave of outbreaks. Individuals may

remain reluctant to fully emerge -- both physically and economically -- when the

containment measures are lifted. 

- The pandemic itself could also result in structural changes in the economy.

Even if the economy as a whole bounces back quickly when the shutdown is eased,

some sectors may be permanently affected."

- Fiscal action "is particularly important in the current context of high

household indebtedness, which could amplify the impact of the shock."

- "Stimulating demand cannot do much to influence inflation as long as the

stores, and indeed much of the economy, remain closed."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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