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Kevin Carmichael<\/span> <\/div><\/div>\n<\/picture>Bank of Canada Governor Tiff Macklem at the Bank of Canada in Ottawa, Oct. 7, 2021. <\/span> Photo by Blair Gable\/Reuters files<\/span> <\/figcaption><\/figure>\n<\/header>\n\nArticle content<\/h2>\n
Bank of Canada governor Tiff Macklem left the door open for further tapering of the central bank\u2019s bond-buying program, using his first public appearance in a month to say he remains confident that economic growth will be \u201cstrong\u201d over the second half of 2021.<\/p>\n<\/section>\n
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His assertion was significant because forecasters and investors have turned glum in recent weeks. The Conference Board of Canada this week said gross domestic product (GDP) will expand 5.1 per cent this year, compared with a previous estimate of 6.7 per cent, citing weaker exports.<\/p>\n
The business press is replete with stories about stagflation, as price indexes surge to their highest levels in decades despite flagging growth. Canada\u2019s consumer price index (CPI) increased 4.1 per cent in August from a year earlier, well outside the Bank of Canada\u2019s comfort zone of one per cent to three per cent.<\/p>\n
It\u2019s all made the markets for bonds and stocks jittery. Some investors wonder if traders are now conditioned to expect central bankers to keep interest rates pinned at zero, oblivious to the possibility that policy-makers could blink in the face of rising prices and begin lifting borrowing costs in order to satisfy their inflation targets.<\/p>\n<\/section>\n
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The Conference Board\u2019s new outlook sees the CPI running ahead of the Bank of Canada\u2019s two-per-cent target for another year, suggesting Macklem and his deputies will face constant pressure to reduce monetary stimulus.<\/p>\n
\u201cIt\u2019s a completely artificial market and it\u2019s priced as if it\u2019s priced for deflation, not for inflation,\u201d Jim Keohane, the former head of the Healthcare of Ontario Pension Plan, told the Financial Post recently. \u201cThe bond market is pricing as if inflation is going to be transitory, and maybe it will be, but if it\u2019s not, I think there\u2019s a lot of downside risk.\u201d<\/p>\n
Macklem used what were likely his final public remarks before the Bank of Canada\u2019s next interest-rate announcement on Oct. 27 to urge calm, emphasizing that nothing much has changed over the past few weeks. He also still thinks inflation is transitory, arguing that most of the upward pricing pressure is coming from \u201cunique circumstances\u201d related to the pandemic.<\/p>\n<\/section>\n
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Those circumstances could persist longer than central bankers anticipated earlier this year, but they should recede in time, Macklem told reporters on Oct. 7. He cited the example of lumber prices, which skyrocketed when there was an extreme mismatch between demand and supply, but crashed as soon as sawmills caught up to their order books.<\/p>\n
\u201cThere is a lot of ingenuity. We do tend to work through these\u201d price spikes, he said. \u201cIt\u2019s going to take some time.\u201d<\/p>\n
More important were his comments on the growth outlook. The Bank of Canada in July predicted Canada\u2019s GDP would expand six per cent in 2021, a forecast that now looks overly optimistic. The same forces that are pushing prices higher \u2014 extreme supply shortages and transportation bottlenecks \u2014 are also impeding growth by slowing factory production and exports.<\/p>\n<\/section>\n
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