And Tiff agrees!

Just hours after the Fed's rate decision and statement, Bank of Canada Governor Tiff Macklem spoke before the Standing Senate Committee on Banking, Trade and Commerce in Ottawa. His opening statement makes it clear that the Bank continues to expect the current inflation spike to wane after the third quarter of the year, and still does not envisage tightening its policy settings until the second half of 2022. Here are a few key quotes, with commentary:

....we forecast strong consumption-led growth in the second half of this year as vaccinations progress further and restrictions ease. Fiscal stimulus from the federal and provincial governments will also make an important contribution to growth. Strong foreign demand and higher commodity prices are expected to drive exports and business investment, leading to a more broad-based recovery. In our April MPR, we projected that the economy will grow by around 6½ percent this year, about 3¾ percent in 2022 and 3¼ percent in 2023.

Two related points here: first, real GDP is already almost back to its pre-pandemic level, so growth at these rates would quickly eat into the surplus capacity that the Bank of Canada is counting on to keep inflation in check. Second, it might be noted that before the pandemic came along, the Bank had been steadily revising its estimates of the economy's potential growth rate downward, to well below the levels it is now projecting. 

Our monetary policy remains grounded in our inflation-targeting framework. The most recent data show that inflation remained above 3 percent in May. Inflation will likely remain near the top of our 1 to 3 percent inflation-control target range through the summer. This largely reflects base-year effects combined with much stronger gasoline prices. As these base-year effects fade, Governing Council expects the ongoing excess supply in the economy to pull inflation back down. In our most recent policy announcement last week, Governing Council judged that the economy still needs extraordinary monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. Based on our latest projection, this is expected to happen sometime in the second half of 2022, although this timing is unusually uncertain given the difficulties in assessing the economy’s supply capacity. 

The Bank's confidence that base effects are the primary driver of the inflation spike is a little puzzling, given that just yesterday -- i.e. literally hours before Macklem spoke -- Statistics Canada had released above-expectations inflation data for May that it explicitly said were not mainly driven by base effects.  The final sentence of the quoted paragraph at least acknowledges the existence of supply-side constraints that could push prices higher. Risks to the inflation outlook are surely to the upside, especially if the economy achieves the growth rates the Bank is projecting. 

The final sentence of Macklem's remarks could have been lifted directly from the FOMC statement: 

We remain committed to providing the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.

The takeaway from all this is that both central banks know they are going to have to remove the punchbowl at some stage, but both are uncertain and even nervous about starting to do so.