Global inflation is easing, and lower rates are on the horizon, but those who didn’t take advantage missed out. That was the message from the Bank of Canada (BoC) Governor, speaking at the International Economic Forum of the Americas yesterday. Governor Tiff Macklem told the conference that central banks have made significant progress on inflation, and monetary policy no longer needs to be as restrictive. However, the risk of rapid inflation remains and that means a return to pre-pandemic rates is unlikely.
Monetary Policy No Longer Needs To Be As Restrictive
The BoC Governor emphasized monetary policy decisions have been working to moderate inflation. CPI fell to 2.7% in April, within the central bank’s target range (1 to 3%), and labor conditions are easing rapidly. That made the central bank comfortable trimming the overnight rate by 25 bps to 4.75%, a similar level to a year before.
“With further and more sustained evidence that underlying inflation is easing, monetary policy no longer needs to be as restrictive as it has been,” explained Governor Macklem.
A Return To Pre-Pandemic Interest Rates Is Unlikely In The Future
Even with the progress, they warn the battle to contain inflation has been a long one. That means there’s a good chance the overnight rate may not need to be trimmed to pre-pandemic levels to get people borrowing again.
“Interest rates may be easing in many economies, but global interest rates are unlikely to return to pre-pandemic levels. The new normal won’t be the old normal. And if we’re not going back, we’ll all need to adjust,” warns Macklem.
Global Inflation Can Surge Much Faster In The New Economy
The news may be disappointing to some, but the Governor expressed concerns about reigniting inflation. The central bank is growing increasingly concerned that non-monetary policy measures can drive inflation higher, but it’s still their problem to deal with. The concerns cited include geopolitical tensions, technology, climate change, and shifting trade and investment flows. As a result, they see the potential for more supply-side shocks that can wreak havoc on the economy.
The central bank also expressed concerns about its credibility with the public. Calling it “dented” by the inflationary shock, Governor Macklem stated they would communicate more with the public and investors. Though he appears to be ignoring his statement that rates will be “low for long,” contributed to the demand-side stimulus in the first place.
Elevated global interest rates are both good and bad news. Low rates are indicative of an economy that needs stimulus to grow, with the pre-pandemic levels being established to deal with the liquidity shock post-Global Financial Crisis (GFC). Those fears of inflation never picking up again are clearly behind us, indicating things may be healthier going forward. On the other hand, the loss of cheap credit means productivity-driven growth needs to take control—an issue Canada is poorly prepared for.