Ottawa –
Canada faces its own set of economic challenges and the central bank is setting interest rates accordingly, said Carolyn Rogers, with the Bank of Canada and the US Federal Reserve charting different paths. It looks like there is
In a speech in Winnipeg on Thursday, the Bank of Canada’s senior vice governor touted the benefits of having an independent monetary policy.
Rogers said the world is interconnected, but the Bank of Canada needs to do what’s best for Canada and other central banks need to do what’s best for their country.
“We always think globally, but we have to act locally,” she said. “We need to adjust our policies to the situation in Canada.”
Her comments came a day after the central bank left key rates unchanged for the first time in a year, with the US Federal Reserve suggesting further rate hikes are on the way.
In its January 25 interest rate decision, the Bank of Canada said it planned to sit on the sidelines in the hope that previous rate hikes could be enough to keep inflation in check.
In his speech, the Senior Vice-Governor analyzed the global and domestic conditions that caused runaway inflation and noted that the Bank of Canada’s interest rate hike was aimed at tackling domestic inflation.
Rogers said what began as rising prices, driven by rising commodity prices, surging global demand for commodities, and supply chain disruptions, has become a domestic phenomenon as Canada’s economy overheats.
While Canada’s inflation experience has a lot in common with other countries, Mr. Rogers said, “we also see some differences.”
Rogers said Canada had the second lowest rate of inflation in the G7, economic growth was the strongest and job growth strong since interest rates began rising, pointing to some specific differences.
At the same time, productivity growth is the slowest and Canadian households are among the most indebted in the G7.
“As global inflationary pressures continue to recede, countries will need to chart their own path to restore price stability,” Rogers said.
Monetary policy divergences between Canada and the US could weaken the Canadian dollar and make imports more expensive.
In a question-and-answer session after his speech, Rogers said there was “no doubt” that what was happening in the U.S. economy would affect Canada.
“It’s true that the dollar is going down. That means imports will be more expensive. That could put upward pressure on inflation,” Rogers said.
“If that happens, it will have to be factored into our projections.”
At a later press conference, Rogers said the U.S. and Canadian economies have some differences that affect monetary policy in each country.
“Inflationary pressures are slightly lower than they are seen in the United States,” she said.
The central bank hopes to keep interest rates stable, but has made it clear that the suspension is contingent on expected economic performance and lower inflation.
On Thursday, Rogers made that point again.
“If economic development is going as expected and inflation falls as quickly as expected, there is no need to raise interest rates further,” Rogers said.
“But we stand ready to do more as evidence accumulates to suggest that inflation may not fall as we have predicted.”
In his speech, Rogers noted that the board had found a “complex situation” when evaluating recent economic data, and also referred to Wednesday’s interest rate decision.
“But overall, things are rolling out broadly in line with our outlook,” she said.
Economic growth has slowed markedly, with the Canadian economy not recording growth in the fourth quarter.
But Rogers said the labor market remains “very tight”.
The Bank of Canada has recently stressed that wage growth has hovered between 4% and 5%, inconsistent with the central bank’s 2% inflation target.
The central bank says the economy must show productivity growth to justify its wage growth.
“Productivity has not gone in the right direction so far, as labor productivity has declined for three straight quarters,” said Rogers.
This report by The Canadian Press was first published on March 9, 2023.
