The bank's deputy governor stresses two percent inflation target as Trudeau announces new affordability measure
Bank of Canada deputy governor Rhys Mendes stated that allowing for a period of price declines might seem appealing but would ultimately cause greater pain for Canadians.
Mendes made these comments during a speech in Charlottetown on Tuesday, emphasizing the importance of maintaining inflation at the two percent target, according to BNN Bloomberg.
He explained that attempting to lower prices would require the central bank to apply further economic pressure through high interest rates, leaving most people worse off.
“Even though it may seem counterintuitive — it would be painful for many Canadians if we were to try to bring about a period of price declines,” Mendes noted in prepared remarks.
Mendes also warned that lower prices could alter inflation expectations, complicating the central bank’s ability to stimulate spending during an economic downturn.
Consumers expecting falling prices might delay purchases, prompting businesses to reduce prices further, creating a deflationary cycle.
“Escaping a deflationary cycle of this nature can be extremely difficult,” he stated. He highlighted that maintaining inflation at two percent reduces these risks.
The Bank of Canada cut its policy interest rate by half a percentage point last month after inflation fell to 1.6 percent in September. Inflation subsequently returned to two percent in October and is expected to remain at target levels.
Mendes acknowledged that the central bank’s success in reducing inflation has not alleviated the challenges Canadians face in keeping up with rising costs.
He noted that not everyone has seen wage increases sufficient to match higher prices but added that monetary policy is not equipped to address such inequities.
As frustration with affordability persists, the Liberal government has faced political criticism, which has benefitted the federal Conservatives.
In response, Prime Minister Justin Trudeau announced a plan to provide a two-month GST break on certain items starting December 14. The government will also issue $250 cheques to Canadians who worked in 2023 and earned up to $150,000.
Mendes underscored that keeping inflation at the two percent target remains essential for ensuring long-term economic stability.
