Stephen_Poloz_Governor_BoC_Web

Inflation has repeatedly fallen short of the BoC‘s 2% target in recent years, but governor Stephen Poloz says Tuesday fundamental factors are continuing to drive price growth.

In a luncheon speech to CFA Montreal and the Montreal Council on Foreign Relations, Poloz says the fundamental drivers of supply and demand, as well as short-term factors, can explain the movement in prices and that the popular perception that inflation has become inexplicable is exaggerated.

Read: Slower growth for Canada in 2018

“In part this perception reflects a misunderstanding of the accuracy with which economists can predict inflation and a misunderstanding of the precision with which central banks can control it,” he says, according to a prepared text of his speech released in Ottawa.

Inflation in Canada slowed over the first half of this year and remained in the lower half of the Bank of Canada’s target range even as the economy grew quickly.

However Poloz says that there have been a number of one-time factors including below-average food inflation and the Ontario government’s reduction in electricity prices that helped keep inflation in check.

Read: Economic indicators point to further BoC rate hikes

“The bottom line is that fundamental drivers of inflation, along with some special factors we can identify, can explain the recent behaviour of inflation reasonably well,” Poloz says. “Certainly the remaining shortfall is well within a reasonable margin of error.”

Poloz also says there may also be some drag on inflation from globalization and digitalization, which the bank is studying. “Over time, as we accumulate data, we may be more able to identify and statistically quantify these effects.”

The BoC aims to keep inflation at 2%, the midpoint of a range of 1% to 3%, by making changes to its key interest rate target.

Read: Bank of England hikes despite Brexit concerns

In keeping the rate on hold last month, the BoC said less monetary policy stimulus will likely be required over time, but that it will be cautious in making future adjustments to the policy rate and be guided by the incoming economic data.

“A lot of pieces need to fall into place before we can be certain that the economy has made it all the way home,” Poloz says Tuesday.

Reaction

The BoC is in no rush to pre-judge achieving 2% inflation and to act accordingly through pre-emptive tightening, says Derek Holt, vice-president and head of capital markets economics at Scotiabank, in a report. “That remains the most important message the BoC is delivering these days.”

He notes that the loonie and rates markets “largely shook off the speech because, while it put a different spin on uncertainty, the broad messages of caution and uncertainty were not new.”

He characterizes the speech as dovish or neutral in the near term and hawkish in the longer run.

“That’s in keeping with our forecast for a pause until April, two hikes in 2018 (April, September) and three in 2019,” he says.

Read the full speech by Governor Poloz and the full Scotiabank report.

Originally published on Advisor.ca
Add a comment

Have your say on this topic! Comments are moderated and may be edited or removed by
site admin as per our Comment Policy. Thanks!