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The Bank of Canada must chart its own course



Canada faces its own economic challenges and its central bank is shaping its policy path accordingly, Bank of Canada Senior Deputy Governor Carolyn Rogers said Thursday.

In the text of a speech delivered in the early afternoon in Winnipeg, Rogers praised the merits of an independent monetary policy.

Even though the world is interconnected, she said, the Bank of Canada must do what is best for the country, just as other central banks must make the decisions that best suit their own context.

Although we still think globally, we must act locally. We need to adapt our policy to the Canadian context.

Carolyn Rogers, Senior Deputy Governor of the Bank of Canada

Mme Rogers was speaking after the Bank of Canada announced on Wednesday that it was leaving its key interest rate unchanged, a first in a year, and its policy now appears to diverge from that of the United States Federal Reserve, which has said further rate hikes were to be expected.

In its decision on January 25 on its monetary policy, the Bank of Canada had indicated its intention to pause and seemed to hope that the eight hikes announced over the past 12 months would be enough to stifle inflation.

In her speech, the Senior Deputy Governor analyzed the global and domestic circumstances that have caused runaway inflation, noting that the Bank of Canada’s rate hikes are aimed at tackling domestic inflation.

Mme Rogers explained that what started as a price spike caused by high commodity prices, an increase in global demand for goods and disrupted supply chains, turned into a national phenomenon when the Canadian economy started to overheat.

And while Canada’s inflation experience has a lot in common with that of other countries, “there are also some differences,” Rogers.

Only one G7 country has had lower inflation than Canada, Canadian economic growth has been the strongest in this group since interest rates started to rise, and job growth has also been strong, clarified Rogers.

At the same time, productivity growth is one of the weakest and Canadian households are among the most indebted in the G7.

As global inflationary pressures continue to ease, each country will have to chart its own course to return to price stability.

Carolyn Rogers, Senior Deputy Governor of the Bank of Canada

The interest rate differential between Canada and the United States could also weaken the Canadian dollar, making imports more expensive.

In a question and answer period following her speech, Rogers said there was “no doubt” that what happens in the US economy has implications for Canada.

“It is true that if our dollar depreciates […] this could mean that imports entering the country will cost more. This can put upward pressure on inflation,” Rogers.

“If that happens, it will have to be factored into our forecast. »

“Contrasting balance sheet” in the data

Even though the central bank expects to maintain its key rate, it has made it clear that this pause is conditional and that it will depend on the economic performance and the slowdown in inflation, which will have to be in line with its forecasts.

Thursday, Rogers again emphasized this element.

“If the economy develops in line with our forecasts and inflation declines as fast as the Monetary Policy Report January, we shouldn’t have to make any further hikes,” said Rogers.

“However, if data showing that inflation is not falling as expected accumulates, we are ready to do more. »

In her speech, the Deputy Governor also discussed Wednesday’s rate decision, noting that the Governing Council faced a “mixed record” when assessing recent economic data.

“That said, the economy is generally moving in line with our outlook,” she said.

Economic growth has slowed significantly, with the Canadian economy posting zero growth in the fourth quarter of 2022.

However, Rogers observed that the labor market was still marked by “great tensions”.

The Bank of Canada recently pointed out that wage growth, which hovers between 4% and 5%, is not compatible with the central bank’s inflation target of 2%.

The central bank says the economy would need to experience productivity growth to justify this rate of wage growth.

“Well, last week’s data shows that labor productivity in Canada has declined for a third quarter in a row. It is therefore not yet going in the right direction, ”said Rogers.

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