Inflation is at a multi-decade high, but the situation is different from the 1970s, when high inflation was combined with high levels of unemployment and slow or recessionary economic growth, a top official said on Thursday. head of the Bank of Canada.
In a speech in Montreal, Bank of Canada Deputy Governor Toni Gravelle said there had been a “perfect storm” that had helped boost inflation as the strength of the economic recovery, Supply chain disruptions and the Russian invasion of Ukraine have combined to drive up prices.
However, he said the economy was also “very hot”, as quarter-on-quarter growth in the economy in the second half of last year averaged 6% on a annualized.
Gravelle also pointed to the unemployment rate at 5.2% compared to an average of around 8% from 1976 to 1982.
“It’s not the 1970s again,” he said, according to the prepared text of his speech released in Ottawa.
Gravelle said the bank expects inflation to average nearly 6% in the first half of the year, but with March’s reading higher than it expected, it will likely revise its forecast.
The Bank of Canada raised its key interest rate target by half a percentage point to one percent last month in a bid to help curb inflation and warned that further rate hikes are to come.
“We are facing an economy that is showing clear signs of overheating, very tight labor markets and this perfect inflationary storm of world events and changing preferences,” he said according to the text.
“All of this means that our policy rate, at 1%, is too stimulative, especially when inflation is well above the top of our control range. »
The other difference between now and the 1970s, Gravelle said, was the Bank of Canada’s inflation-targeting agreement with the federal government. He said the monetary policy framework, which was first adopted in 1991, has helped keep both inflation and future inflation expectations low.
Federal Conservative leadership candidate Pierre Poilievre has criticized the Bank of Canada and its actions during the pandemic.
During a leadership debate in Edmonton on Wednesday, Poilievre said he would replace Bank of Canada Governor Tiff Macklem because inflation is at its highest level in decades.
This report from The Canadian Press was first published on May 12, 2022.