Bank of Canada’s Deputy Governor, Rhys Mendes, has stated that deflation might seem beneficial for a short period but could ultimately become more painful for Canadians.
He made this remark on Tuesday in Charlottetown during a speech emphasizing the importance of the two percent inflation target. His comments came after the Bank of Canada declared victory in its fight against inflation, despite ongoing dissatisfaction among Canadians about high prices across the country.
In a prepared statement, Mendes said, “It may seem counterintuitive, but if we had tried to lower prices at a certain point, it would have been even more painful for many Canadians. Reducing prices would have required high interest rates, which would have further strained the economy and pushed more people into financial hardship.”
He further explained that lowering prices would have affected people’s expectations about inflation. This would have made it harder for the central bank to encourage consumer spending during an economic downturn.
Mendes pointed out that achieving the two percent inflation target would have become even more challenging, as expectations of deflation would have discouraged consumers from making purchases. As a result, businesses would have no option but to reduce prices, further incentivizing consumers to delay purchases.
He added, “Escaping this deflationary cycle would have been extremely difficult. Maintaining inflation within the two percent target has mitigated that risk.”
Last month, the Bank of Canada reduced its policy interest rate by 50 basis points. This decision followed a decline in inflation to 1.6 percent in September. As a result, inflation rose to two percent in October and is expected to remain within the target range in the future.
