Policymakers will wait until they see underlying price pressures cool, even if the economy has entered a period of excess supply, former Deputy Governor Paul Beaudry said.
RATE CUTS TO START IN JULY, FORMER BANK OF CANADA OFFICIAL SAYS
Last week, policymakers led by Governor Tiff Macklem kept the benchmark overnight rate at 5%, but said their focus has turned to how long they’ll need to keep borrowing costs need this high. Markets and economists see the Bank of Canada starting rate cuts at the June 5 meeting.
In the interview, Beaudry reiterated his belief that the neutral rate — the level of interest rates that neither stimulate nor restrict the economy — may be higher now than before the pandemic. The neutral rate is impossible to calculate precisely, but the Bank of Canada creates its own estimate for it.
If the neutral rate is higher, it suggests central banks may be more cautious about how deeply and swiftly they cut rates.
The most difficult scenario for the Bank of Canada would be one in which inflation expectations are stuck at an elevated level — for example, if Canadians become accustomed to 3% inflation and bank officials feel the need to “attack it,” Beaudry said. “We haven’t ruled it out in the case of Canada.”
The central bank’s long-run target is 2% inflation.
Story by: Financial Post
