What, me worry?

Inflation fears are starting to make themselves felt across global markets. Commodity prices are rising, as are bond yields, as investors become nervous that ever-expanding government stimulus may cause economies to overheat as and when the coronavirus pandemic starts to ebb.

The Bank of Canada has been saying for some time that it expects to keep its policy settings very accommodative until it sees inflation rise sustainably to its 2 percent policy target, which it does not expect to happen until 2023. Are the current alarm bells in financial markets leading the Bank to change its thinking? Not yet, if this speech, delivered virtually today by Governor Tiff Macklem to the two largest chambers commerce in Alberta, is anything to go by. 

Early in his remarks Macklem stated that "The Bank's latest forecast doesn't anticipate economic slack being fully absorbed until into 2023", a clear indication that the expected timetable for tightening remains unchanged. The Bank expects "an even more protracted recuperation period while the economic potential that was lost over the course of the pandemic is rebuilt."

The bulk of the speech looks at this period of recuperation mainly from the perspective of the labour market. As Macklem notes, the impact of the pandemic has varied widely across sectors, income groups and genders. Industries where physical distancing is impossible -- hospitality, the arts, air travel --  have been "hammered", while industries where physical distancing or remote work is possible have fared much better.  Far more low-wage jobs have been lost than higher-paying positions and, because women hold a disproportionate share of jobs in the hardest-hit sectors,  they have suffered far worse job losses than men. 

As COVID restrictions ease in line with the vaccination rollout, the Bank expects "some bounceback in employment in the near term. And, as with the first reopening, we should also see some reversal of the pandemic’s uneven impact in the labour market." However, the Bank does not expect to see "the same economy we had before".  The COVID pandemic has accelerated what Macklem refers to as the Fourth Industrial Revolution, based on technology, automation and e-commerce. This will create new opportunities for many workers, but also means that  "some of the jobs that have been lost during the pandemic will not return. And the workers who have already borne the brunt of the pandemic may be especially affected." 

Macklem concluded his remarks by looking at the policy implications of the scenario he had outlined, for the private sector, for Government and for the Bank itself. He reiterated yet again the commitment to a long period of policy stimulus: "We have committed to keeping our policy interest rate at the effective lower bound until economic slack is absorbed so that our inflation target is sustainably achieved. And we have backed up this commitment with our program of large-scale government bond purchases." And at the very end, he directly addressed the inflation concerns that are keeping investors awake at night:

"I began this speech by highlighting the health of Canada’s labour market before the pandemic. Unemployment had been around 40-year lows for a couple of years. Based on past economic cycles, we would have expected inflationary pressure to begin to rise. But inflation wasn’t threatening to take off. As the pandemic recedes and the recovery continues, we will keep that experience in mind. Monetary policy can continue to support demand in order to minimize scarring and bring as many people into the work force as possible."

It's said that the most dangerous phrase in the investment lexicon is "this time it's different", but for now, that's the bet that the Bank of Canada seems willing to make.