August 24, 2023
Former Bank of Canada Governor Stephen Poloz says inflation is likely to cool faster than people are expecting, opening the door for lower interest rates.
The economist, who led Canada’s central bank from 2013 to 2020, said the country’s stronger-than-expected growth in the first half of the year was driven by population increases and the resolution of unique supply shocks from the pandemic. An early-year jump in household spending was likely a mirage, he said, driven by savings built up during the Covid lockdowns.
“I don’t think the consumer is as resilient as the data will make them look,” Poloz said in an interview.
Canada’s economy grew at a 3.1% annualized pace in the first quarter, which many analysts interpreted as proof that interest rates should rise further. Governor Tiff Macklem and the central bank’s policymakers did exactly that, boosting rates in June and July to bring the overnight lending rate to 5%, the highest since 2001.
The former governor also cautioned that Canada’s low unemployment rate — 5.5%, near a record — shouldn’t be seen purely as the result of strong economic demand. There’s also an earthquake happening in the labor market, as an army of experienced workers retire. Even the youngest baby boomers are now about 60 years old.
As for the risk of workers’ expectations reigniting inflation, Poloz is optimistic that productivity gains will act as a “wedge” between inflation and wage demands in coming years. If companies can produce more per hour of work, higher salaries for their workers don’t create the same price pressures, he argued.
Despite his more sanguine view of inflation, Poloz said he understands central bankers’ recent moves to tighten policy as a prudent way to finish the job and get price pressures all the way back to the 2% target. He made the comments ahead of the release of data that showed the inflation rate accelerated to 3.3% in July.
