The Canadian economy may need to find a way to permanently adjust to higher oil and gas prices even when the cost of other goods start to fall, according to a former Bank of Canada governor.
In an interview Wednesday with CBC News Network’s Power & Politics Stephen Poloz, who was the Bank of Canada governor from 2013 to 2020, said Canada’s inflation rate may get back down to the official two per cent target in a year or two, but he struck a less optimistic note when it came to the higher cost of fuel.
“We might have to pay more for oil and gas forever,” Poloz told host Vassy Kapelos. “And if that’s the case, that’s not inflation. It’s a higher price that we’ll have to pay and we’ll adjust to that higher price somehow in our economy.”
Earlier in the day Statistics Canada reported that Canada’s inflation rate hit a nearly 40 year high of 7.7 per cent.
While the average cost of food items went up 9.7 per cent over the past year, it’s the higher cost of gas — up 48 per cent compared to a year ago — that’s the single biggest factor affecting the inflation rate.
WATCH | Call to fire Bank of Canada governor is ‘pure politics’: Stephen Poloz
Poloz said the key question Canada’s central bankers will examine in trying to manage inflation is how the high fuel prices end up affecting other parts of the economy.
“That is the part that is subject to control, and that is the part the central banks will be responding to, not the energy costs themselves,” he said.
The bank has raised interest rates a number of times this year, citing inflation. The benchmark interest rate is currently 1.5 per cent.
The United States Federal Reserve recently hiked its benchmark interest rate 75 bases points to 1.75 per cent, its single biggest hike in decades.
Poloz said he expects the inflation rate to start ticking down in the latter half of the year, in part because of the Bank of Canada’s tightening.
“I think people will be reassured by it,” he said.
Poloz defends central bank against criticism
Some politicians and economists have criticized the Bank of Canada for waiting too long to raise interest rates as demand for goods and services recovered from COVID-19-related shutdowns.
But Poloz defended the bank’s monetary policy, saying it was difficult to predict the effects of the Delta and Omicron variant waves on the economy.
“We were pretty resilient to those. So of course if you had known how things would turn out, I think you might have done it differently,” Poloz said.
“But of course the fact is we didn’t know how it would turn out. And so it was right to be cautious throughout this.”
Poloz said the cautious approach to raising interest rates was necessary to guard against what he says was a greater threat than inflation — deflation, or a drop in prices. He said a failure to protect against deflation would have “run the risk of creating the second Great Depression.”
“We should all be pretty happy that that was averted.” Poloz added.
Conservative leadership candidate Pierre Poilievre has been particularly critical of the Bank of Canada’s monetary policy, accusing it of “printing money” and fuelling rising prices. Poilievre has said that, if he becomes prime minister, he’ll fire the current Bank of Canada Governor, Tiff Macklem.
Poloz called the proposal “pure politics” and “unfortunate.”
He also didn’t welcome criticism of the institution he once led.
“It’s unfortunate that politics infects the monetary policy process at all. Central banks are designed to be separate from politics and for very good reasons,” Poloz said.
He said that traditionally, central banks are independent because of the threat of political pressure to loosen interest rates, and potentially cause inflation as a result — but now political pressures are coming from the other direction.
But Poloz said there is a silver lining to criticism of the bank.
“I’m gratified that right now, the public perception is that inflation is is a bad thing and we should fight it,” he said.
Higher interest rates would cause ‘pain’: NDP leader
NDP leader Jagmeet Singh said the higher borrowing costs that come with rising interest rates will hurt many Canadians.
“Increasing interest rates are going to make the immediate, short-term pain even harder. Mortgage payments are going to go up, car payments are going to go up,” he told Power & Politics Wednesday.
“And this is why we’ve been saying that the traditional response to inflation has always been to increase interest rates, and it will lessen demand certainly, but it’s going to increase the pain, so we’ve said that can’t be the only response.”
Singh also said he’d like to see the federal government impose corporate tax levies that can be redistributed to people, and a doubling of the GST/HST tax credit.
WATCH NDP calls for doubling of GST/HST tax credit
Singh, whose party is propping up the Liberal government in the House of Commons through a supply and confidence agreement, said he spoke to Prime Minister Justin Trudeau in a phone call yesterday about financial relief measures.
Singh told host Vassy Kapelos that the Liberal government may not be able to count on his party’s support in Parliament if nothing is done to address the rising cost of living.
“Our support on helping pass bills is not something that they can take for granted if they’re not going to deliver the help that Canadians need,” Singh said.
Liberal member of Parliament and Parliamentary Secretary to the Minister of National Revenue Peter Fragiskatos said a gas tax holiday, a policy American President Joe Biden recently proposed, is not off the table.
“It’s not to be ruled out. The question is will it have an impact, will it have a meaningful impact, a direct impact in the way that some, including Conservative politicians, say that it will,” he said.
“It’s not clear that it would. It’s such a volatile environment right now,” he said, citing the war in Ukraine.
WATCH | MPs debate tools to tackle the soaring cost of living
If Biden’s ‘tax holiday’ proposal is successful, Canada would be the only G7 not to bring in a tax cut or subsidy in response to fuel prices.
Dan Albas, the Conservative finance critic, said relief at the pumps would have positive effects on the rest of the economy.
“Let’s also remind ourselves that gasoline is a key driver of inflation, whether it be at the grocery store or whatnot, you need to have the transportation costs [down],” Albas said.