The rapid digitization of the Canadian economy in the COVID-19 pandemic has helped limit the damage to potential output, and that means the economy will be able to grow more quickly without sparking inflation, the Bank of Canada said on Thursday.
Deputy Governor Timothy Lane, in a speech to Western Canadian financial advisors, said the central bank now expects inflation to run hot for longer than in its April forecasts, before eventually moderating as base-year effects recede.
“There is no doubt the recession caused by the pandemic… will result in lost capacity and scarring. But the accelerated digital transformation has supported resilience so much that we now think the damage to potential will be less than we earlier feared,” he said.
“There is a good chance that productivity growth — a key driver of potential — will be stronger than expected, giving the economy more room to grow before inflation becomes a worry.”
Lane said despite a harsh third wave of infections that led to more lockdowns and hit employment, recent economic data show signs of increasing resilience that bodes well for the recovery.
“With Canada’s vaccinations now in high gear and lockdown measures helping to contain the virus, this setback should be temporary,” he said.
The Bank of Canada now expects inflation to stay around 3% – the top end of its 1-3% inflation control range – through the summer and then ease later in the year, said Lane.
Inflation hit 3.4% in April, its fastest pace in a decade, mostly due to the base-year effect and high commodity prices.
Lane also said Canada‘s red hot housing market is showing signs of moderating, though activity remains very high.
The Canadian dollar was up 0.2% on the day, trading at about 1.2085 to the U.S. dollar, or 82.75 cents.
(Reporting by Julie Gordon and David Ljunggren in Ottawa; Editing by Marguerita Choy)
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