Mistakes were made fighting recent inflation, Bank of Canada Governor Tiff Macklem has detailed in a new essay.
Mr. Macklem said he and his team underestimated the inflationary risk from the mix of supply shocks and high consumer demand during the COVID-19 pandemic.
He also said that the bank’s models were not accurately adjusted to gauge price pressures across the economy, and officials did not pay enough attention to the potential sharp increase in inflation.
“We need to be humble, when humility is due,” Mr. Macklem wrote in the essay in “Monetary Policy Responses to the Post-Pandemic Inflation” published by the Centre for Economic Policy Research.
“This means explaining our forecast errors, and their implications, openly and clearly. Being open is always important, but it is especially crucial in uncertain times—and as we work to bring inflation back to our 2 percent target.”
Mr. Macklem cites circumstances surrounding COVID-19 as the ultimate cause of “pronounced” supply shocks.
“Post-pandemic, the inflation response was different,” he wrote, “we were faced with a series of negative supply shocks just as the economy was reopening, and the effects of these supply shocks on prices and inflation were faster and more pronounced than usual.”
This, coupled with heightened consumer demand during the pandemic, led to an underestimation of inflationary risks, Mr. Macklem wrote.
He attributed the underestimation to Central Bank modelling flaws which did not take into account periods of “excessive demand.”
Besides poor modelling, Mr. Macklem acknowledged the inadequate timing of rate hikes due to the misjudgment of inflationary pressures that they considered, at the time, to be “transitory.”
Mr. Macklem’s essay is a part of widespread effort by central banking heads across the West to come to terms with the past years’ inflation woes and aim for better future responses.
‘Deficit Spending’
Conservative Leader Pierre Poilievre has criticized the Bank of Canada for its monetary policy in response to the pandemic and has pledged to fire Mr. Macklem if he becomes prime minister. Mr. Poilievre has also blamed rising inflation primarily on government spending, as well as Liberal policies such as the carbon tax.“After eight years of Justin Trudeau, everything costs more with the worst inflation in 40 years,” he said. “After eight years of Justin Trudeau promising debt was consequence-free because interest rates were low, they’ve shot up in the fastest relative terms in Canadian history and they are a direct result of his deficit spending.”
Mr. Poilievre has promised to “cap government spending and cut government waste” to balance the budget and bring down inflation rates if his party forms the next government.
