BoC Governor Stephen Poloz delivered his final speech yesterday, before stepping down next week. He noted that the “dominant concerns” for the coronavirus crisis response was “was with the downside risk and the possibility that deflation could emerge.”

“Deflation interacts horribly with existing debt, the two main ingredients of depressions in the past,” he added. “In effect, then, we were saying that the downside risks were sufficiently dire that there were no relevant trade-offs for monetary policy-makers to consider.”

He admitted that the actions will “clearly lead to higher indebtedness, for governments in particular”. Getting the economy back onto its growth track is “the surest means of servicing those debts over time”.

However, with the situation “more like a disaster than a recession”, confidence is expected to be “buttressed by fiscal income supports” and a “reasonably swift return to growth”. But, “any structural damage, such as business failures and labour market scarring, will of course take longer to repair.”

Poloz’s full speech here.

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BoC Governor Tiff Macklem said in a speech that “recent developments have reinforced our confidence that inflation is coming down.” The bank expects CPI to fall to around 3% in the middle of 2023, and the reach 2% target in 2024. But, “if those things don’t happen, inflation won’t come back to our 2% target, and additional monetary tightening will be required.”

Macklem noted that the tightening pause as announced in January was “conditional”. He said, “it is conditional on economic developments evolving broadly in line with the outlook published in January.”

“The transmission mechanism takes time—typically we don’t see the full effects of changes in our overnight rate for 18 to 24 months. That’s why policy needs to be forward looking,” he explained. “In other words, we shouldn’t keep raising rates until inflation is back to 2%. Instead, we need to pause rate hikes before we slow the economy and inflation too much. And that is what we are doing now.”

“If new evidence begins to accumulate that inflation is not declining in line with our forecast, we are prepared to raise our policy rate further,” he said. “But if new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further.”

Full speech here.