OTTAWA – Bank of Canada deputy governor Rhys Mendes says allowing for a period of price declines may sound tempting, but it would ultimately be more painful for Canadians.
Mendes made the comments in a speech Tuesday in Charlottetown on the importance of keeping inflation at the two per cent target.
His speech comes as the Bank of Canada declares victory on high inflation, but Canadians remain dissatisfied with higher prices across the economy.
“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 said in prepared remarks.
The deputy governor said the central bank would have to exert more pain on the economy with high interest rates to bring down prices, an outcome that would likely leave most people feeling worse off.
He said bringing a period of lower prices would also affect people’s expectations of inflation, which would make it harder for the central bank to stimulate spending in the case of an economic downturn.
Mendes said getting back to the two per cent target would also be more challenging because consumers expecting falling prices would continue to put off purchases, triggering lower prices from businesses, which would further incentivize delaying purchases.
“Escaping a deflationary cycle of this nature can be extremely difficult,” he said. “Keeping inflation at the two per cent target mitigates these risks.”
The Bank of Canada lowered its policy interest rate by half a percentage point last month in response to inflation falling to 1.6 per cent in September.
The inflation rate bounced back to two per cent in October and is expected to remain around target moving forward.
But the return to target doesn’t offer relief to Canadians struggling to keep up with the rising cost of living.
Mendes acknowledged that not everyone has seen their wages rise enough to compensate for higher costs, but said monetary policy is not well-suited to address those inequities.
The Liberal government has worn much of the political blame for higher prices, to the advantage of the federal Conservatives.
On Thursday, Prime Minister Justin Trudeau unveiled a plan to give a two-month GST break on a slew of items starting Dec. 14 to help with the affordability crunch.
The federal government is also sending out $250 cheques to Canadians who worked in 2023 and earned up to $150,000.
This report by The Canadian Press was first published Nov. 26, 2024.
