MNI: BOC: Won't Let CPI Stick, Tracking Long-Term Expectations

Bank of Canada Governor Tiff Macklem said Friday he won't allow the jump in energy prices linked to the Iran conflict to become entrenched inflation, and he can look through a rise in near-term price expectations so long as consumers and firms see prices stabilizing over a longer term.

“The Bank will not allow higher energy prices to turn into persistent inflation,” he told reporters during IMF meetings, echoing a view he gave at the last rate meeting. 

Discussions this week in Washington brought a common view that monetary policy must be careful about the timing of any tightening, and countries face different growth and inflation dynamics, Macklem said. 

“We’re all feeling like we don’t want to jump too early and raise interest rates. That would lower growth particularly when growth is already weak. On the other hand, you don’t want to be late and let inflation get a hold, and become entrenched,” Macklem said. 

“That’s what I heard around the table, but different countries are in different positions,” he said. “What the translates into, the actions of different countries, may well be different.”

EXPECTATIONS

The Governor noted while Canadian inflation was near target for more than a year before the conflict and there's slack in the economy, consumer behavior may shift after a number of recent shocks. “People may be more sensitive to inflation now and having lived through a period where inflation went up rapidly, their expectations could shift faster,” Macklem said. 

The March inflation report being published Monday will likely show inflation quickened but remained within the Bank’s 1% to 3% target band, Macklem said. (See: MNI INTERVIEW: BOC 'Straddling Both Sides' In Rate Hold-Stillo)

“We’re not even that worried if we see near term inflation expectations go up, I mean, inflation is going up, people understand that,” he said. “What would concern us is if their medium- and long-term inflation expectations go up.”

The current situation differs from the 2002 price surge because Canada starts with less inflation pressure, he said. But officials also need to learn the lesson from that bout of inflation, he said. 

“Monetary policy cannot resolve the conflict in the Middle East, or structural fragmentation. But it plays a critical role in reducing uncertainty about inflation outcomes, proving an anchor that supports stability,” Macklem said. “There was broad agreement that monetary policy must be alert to the risks and prepared to act if needed.”