Central bank governors gathering in Banff this week are facing several pressure points, from rising prices tied to a trade war to an unsteady global economy that appears to be decelerating. Read More
Economists agree that a slowing global economic outlook is one of several challenges facing G7 finance ministers and central bank governors attending the event in Alberta this week
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Economists agree that a slowing global economic outlook is one of several challenges facing G7 finance ministers and central bank governors attending the event in Alberta this week
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Central bank governors gathering in Banff this week are facing several pressure points, from rising prices tied to a trade war to an unsteady global economy that appears to be decelerating.
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It’s leaving Bank of Canada governor Tiff Macklem and his counterparts in G7 countries with a predicament: do they lower interest rates to boost the slowing economy but add more fuel to inflationary pressures?
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Or do they hold off on cutting rates as stagflation concerns grow?
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“Stagflation — meaning the economy is slowing at the same time that inflation is picking up — that’s a very unusual combination, and it’s happening because of the tariff action from the United States,” Stephen Poloz, the former governor of the Bank of Canada, said in an interview Wednesday.
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“When a central bank faces that, that’s their dilemma — which one am I supposed to worry most about, because I only have one tool. I can cut rates to try and buffer the downside of the economy, or I can be on guard and maybe consider raising rates to make sure the rise in inflation doesn’t become permanent . . . Stagflation is, for sure, the shock that everyone faces.”
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Economists agree that a slowing global economic outlook is one of several challenges facing G7 finance ministers and central bank governors attending the event in Alberta this week, which wraps up Thursday.
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It precedes the meeting of leaders of the seven countries who will gather in Kananaskis in June.
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Varcoe: As G7 finance ministers meet in Banff to discuss global economy, ‘frank discussion’ on tariffs inevitable
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The G7 finance ministers and governors are expected to discuss a series of complex matters, including key risks to the economy, growth policies, monetary policy frameworks and issues around AI productivity.
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The global economy is expected to slow this year amid the U.S. tariffs and the trade conflict.
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“It’s complicating the jobs of central bankers right now, who want to lower interest rates but are unable to do so at the rate they’d like because of the price pressures that tariffs are creating,” ATB Financial chief economist Mark Parsons said Wednesday.
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“It’s making their job a lot harder.”
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In Canada, data released this week indicated the year-over-year inflation rate increased by 1.7 per cent in April, down from a 2.3 per cent hike in March.
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The drop was powered by lower pump prices, which tumbled 18 per cent from a year earlier as the federal government ended the national carbon tax and oil prices dipped.
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Without the effect of energy and the carbon tax, the inflation rate increased by 2.9 per cent, up from 2.5 per cent in March — and consumers continued to feel the pinch at the grocery store.
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“On the surface, it looks OK, but when you dig and look under the hood, there’d be reason to be concerned,” said Alberta Central chief economist Charles St-Arnaud, noting core inflation was above three per cent.
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“It puts the Bank of Canada in a very hard situation, because we’ve seen the labour market be on the weaker side . . . Normally, the bank could cut to provide support, but with inflation being at the top end of the inflation target — and maybe above — it starts to be harder for them to justify cutting.”
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Over the past year, the Bank of Canada has reduced its key policy rate from five per cent down to 2.75 per cent, although it has left it unchanged since the last adjustment in March.
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With the economy slowing and unemployment rising, it sparks questions about the best approach to deal with rising prices.
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During a speech in Calgary in March, Macklem was asked about the risk of stagflation facing the Canadian economy.
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“The reality is new tariffs, combined with retaliatory tariffs, mean a weaker economy and higher inflation,” he told the audience.
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“A weaker economy is going to put downward pressure on inflation. New costs, new tariffs, a weaker exchange rate, supply chain disruptions, those are all going to put upward pressure on inflation. So we’re looking at both of those pressures.”
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South of the border, the U.S. gross domestic product contracted during the first quarter, and the Federal Reserve decided earlier this month it would not reduce interest rates. In April, the U.S. inflation rate was 2.3 per cent compared with a year earlier.
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Analysts believe a trade deal reached between the U.S. and the United Kingdom this month could help ease the uncertainty on the trade front compared with early April, after the White House unveiled its reciprocal tariffs, which were later paused for 90 days.
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But at his company’s investor day meeting this week, JPMorgan Chase & Co. CEO Jamie Dimon spoke about trade concerns still creating risks.
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“I think the chance of inflation going up and stagflation is a little bit higher than other people think,” he said.
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Poloz, who was Bank of Canada governor from 2013 until 2020, noted the U.S. baseline tariff rate of 10 per cent that the United Kingdom agreed to is still relatively high.
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And he equated the uncertainty and effect of tariffs on the economy to “throwing sand into the gears of a beautiful Ferrari. It just doesn’t work as well as before.”
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He said the central bank governors, being non-political, can have a frank discussion at this week’s meetings.
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Some countries will have greater concerns about a stagnating economy, while others may be more focused on inflationary pressures.
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“They would be talking about . . . what’s our biggest problem, which is whether it’s a slowdown in the global economy — potentially recessions in many countries — versus rising inflation because of the tariffs,” said Poloz.
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“We will still all face stagflation, and it’s all about which thing is biggest in your economy.”
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Chris Varcoe is a Calgary Herald columnist.
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