Introduction

Good afternoon. Thanks for inviting me right here as a part of your research on inflation in Canada. I’m happy to have Senior Deputy Governor Carolyn Rogers with me for her first look earlier than this committee.

Since I used to be final right here, the Financial institution of Canada and the Authorities of Canada renewed our joint settlement on Canada’s financial coverage framework. We agreed that the first goal of financial coverage is worth stability. Below the 2022–26 settlement, the cornerstone of our framework stays the two% inflation goal, on the midpoint of a 1% to three% management vary.

And earlier as we speak I spoke to the CFA Society Toronto, the place I defined our coverage determination yesterday to lift our coverage rate of interest by 25 foundation factors to half a %. I additionally reviewed the drivers of the current rise in inflation globally and in Canada. I do know that is straight related to your research, so I’ve given my remarks to the Clerk to share with committee members. I look ahead to additional exploring these points with you as we speak.

Earlier than shifting to your questions, I’d like to speak to you—and Canadians—about three issues.

First, I’d wish to assessment the Financial institution of Canada’s actions over the course of the pandemic: what we had been attempting to attain, what occurred and what would have occurred if we hadn’t acted.

Second, I need to communicate to the considerations many Canadians have in regards to the rising price of residing. I do know many individuals are frightened about costs on the fuel pump and the price of groceries, housing affordability and find out how to save sufficient for retirement. And that angst has been compounded by every thing we’ve gone by over the previous two years of this pandemic.

Third, I need to speak about what’s subsequent. This newest wave of the pandemic is fading, and life is beginning to return to regular—or a brand new regular. I need to share what Canadians can anticipate to see within the economic system, with inflation and from the Financial institution.

The Financial institution of Canada’s actions

On the onset of the pandemic, uncertainty skyrocketed, monetary markets seized up and financial exercise fell off a cliff. About 3 million Canadians misplaced their jobs and greater than 3 million individuals discovered themselves working lower than half of their regular hours. Companies closed store in document numbers. Inflation fell sharply, even dropping into unfavorable numbers. We had been staring down one other Nice Melancholy and the potential for deflation.

Deflation occurs when costs throughout the economic system truly fall. Whereas this may not sound dangerous, the reality is that persistent deflation is harmful. When unemployment rises quickly and total costs start to fall, households could scale back spending in the event that they suppose that items and companies will turn into even cheaper sooner or later. However laying aside spending ends in much less demand, resulting in extra job losses and extra enterprise closures. And this places extra downward stress not solely on costs but additionally on wages. Each can spiral downward, as they did in Canada in the course of the Nice Melancholy. Deflation additionally makes repaying debt dearer—which might have been a extreme drawback for a rustic like Canada, with excessive ranges of family debt.

So when the pandemic started and we had been going through financial calamity, we took extraordinary actions. We lowered our coverage rate of interest as little as we might. We promised to not increase rates of interest till slack within the economic system was totally absorbed, and we bolstered this dedication utilizing quantitative easing. Taken collectively, these actions stored borrowing charges low to stimulate spending and instilled much-needed confidence within the economic system so that companies and households might get better.

Because of the resilience of Canadians, efficient vaccines, distinctive fiscal coverage and the Financial institution’s actions, Canada averted deflation and our economic system has recovered.

Canadians are anxious

However I acknowledge that this reassurance could not mirror what number of are feeling.

Even earlier than the pandemic, many Canadians had been frightened about how they had been faring economically. Not everybody was experiencing the advantages of a rising economic system and a wholesome labour market.

The pandemic intensified individuals’s considerations, layering worries about their well being and that of their family members on high of uncertainty about jobs and companies, the worth of their financial savings and their prospects for retirement.

Reopening the economic system has introduced new problems, resulting in increased inflation world wide and right here at dwelling. The COVID-19 virus continues to flow into and mutate. We’re seeing social upheaval right here in Canada and in different international locations. And within the final week, stunning developments have unfolded in Ukraine at nice human price. The unprovoked Russian invasion can also be creating volatility and uncertainty within the international economic system. We live in anxious instances.

Evidently, financial coverage is just not outfitted to handle most of those points. However it’s outfitted and mandated to regulate inflation. Right here in Canada, inflation is simply above 5%. That’s too excessive. And with oil costs rising additional in current weeks, we will anticipate inflation to maneuver up once more.

I’m positive persons are questioning why costs are so excessive, so let’s unpack it.

The inflation story in Canada has three key parts. The primary is that, by the pandemic many individuals shifted to purchasing extra items and fewer companies. On the identical time, the pandemic disrupted the manufacturing and supply of many gadgets. This has brought on the costs of many globally traded items to rise sharply.

The second is that worth will increase have seeped into an more and more big selection of products, together with on a regular basis gadgets like meals and power. Oil costs are increased due to robust demand, restricted funding in new manufacturing and geopolitical tensions. This implies increased transportation prices, which additional add to the value pressures on items. Meals costs are additionally being affected by excessive climate that has lowered harvests. And powerful demand for housing, within the face of restricted provide, has pushed these costs up.

The third is the energy of the restoration in Canada and the general stability between demand and provide in our economic system. The inflation we’re experiencing as we speak is just not due to total extra demand within the economic system. A variety of indicators recommend that slack within the economic system has simply now been absorbed.

However as we glance forward, spending progress must reasonable in order that demand doesn’t considerably outpace provide and create a brand new home supply of inflation. So we have to tighten financial coverage—or, to place it extra merely, increase rates of interest—to assist management inflation.

The place can we go from right here?

Let me wrap up by explaining what Canadians can anticipate from us going ahead.

Financial coverage has a transparent function in retaining provide and demand in stability and getting inflation again to focus on. To this finish, now we have taken deliberate steps to regulate the diploma of financial coverage stimulus because the economic system recovered—slowing our quantitative easing after which stopping it outright final October.

And we made it clear to Canadians in January that, with the economic system working at capability, our assure of rock-bottom charges had ended. We want increased rates of interest to deliver inflation sustainably again down and preserve the economic system in stability.

Yesterday, Governing Council took the choice to lift the coverage rate of interest by 25 foundation factors to half a %. And we indicated that we anticipate rates of interest might want to rise additional. We additionally stated that we are going to be contemplating when to finish the reinvestment part of our large-scale asset purchases and permit the Financial institution’s holdings of Authorities of Canada bonds to start to shrink. This can be a course of generally known as quantitative tightening, or QT. The timing and tempo of additional will increase within the coverage charge, and the beginning of QT, will likely be guided by the Financial institution’s ongoing evaluation of the economic system and its dedication to reaching the two% goal.

In closing, I need to emphasize to all Canadians that the Financial institution is set to regulate inflation. With that, Senior Deputy Governor Rogers and I will likely be completely happy to take your questions.