Poloz Q&A: No Evidence Inflation Expectations 'De-Anchoring'

--Last Wage Figures Encouraging But Need More Data

By Yali N'Diaye

     OTTAWA (MNI) - While inflation readings have been consistently below the 2%

mid-point target, Bank of Canada Governor Stephen Poloz said Tuesday there was

no evidence inflation expectations were "de-anchoring", pointing at surveys

showing instead that inflation expectations are well anchored.

     During a press conference following a speech to the CFA Montreal and

Montreal Council on Foreign Relations, Poloz also insisted on the symmetric

nature of the inflation framework, and the 18-month horizon, allowing some

flexibility within the 1% to 3% target range. So just as inflation is currently

below 2%, the BOC could let it go above 2% if need be, notably if it was

explained by temporary factors.

     For inflation to be an issue from a policy standpoint, the trend itself

would have to change, Poloz said.

     Oil prices can be such a temporary factor. The central banker suggested he

is looking through the recent oil price increase, since the impact of short-term

oil price moves will eventually fall out of inflation after twelve months.

     Besides, Poloz also stressed the flexibility of the oil market that he

deemed underestimated, citing a more elastic supply curve, especially the quick

supply response that U.S. suppliers can deliver.

     Instead, the BOC is particularly looking at wage developments, with Poloz

stressing the "low" trend line for wage growth. Although the latest figures have

been encouraging, "you never know if it's the beginning of an uptrend," he said.

So more data points will be needed.

     In his prepared remarks earlier, he said, "indicators suggest that a fair

amount of slack remains" in the labor market, stressing the need to monitor how

such slack is being absorbed.

     Eventually, however, he does expect wage growth to finally translate into

higher inflation.

     "We believe that there is still a link between labor market slack and

wages, just as there is still a link between inflation and the balance of total

supply and demand," Poloz said. "What this means is that the closer we get to

full output and employment, the greater the risk that inflation pressures will

appear."

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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