OSLO: A senior Bank of Canada official warns policy restraint may be needed if a supply shock has a large and persistent impact on inflation, even in a scenario where the economy is weakened.
In a speech in Oslo on Monday, deputy governor Sharon Kozicki said that when the economy is in excess supply and inflation is above target, policymakers cannot simply cut borrowing costs to stimulate growth.
Instead, potential responses include holding rates steady, trimming rates by less than typical in a demand shock, or even hiking.
“When a supply shock has small or short-lived effects on inflation, central banks tend to look through the impacts as they set monetary policy. When the economy is weak, they may be able to wait for inflation to return to target on its own,” she said.
“But a look-through strategy has limits. Central banks generally should respond when the impacts of a shock on inflation are larger and more persistent.” — Bloomberg
