BoC Official: Canadians Would Find Allowing Price Declines ‘Painful’

Bank of Canada deputy governor Rhys Mendes emphasizes that allowing for a period of price declines may seem tempting, but it would have more negative consequences for Canadians in the long run.

Mendes delivered these remarks during a speech in Charlottetown on Tuesday highlighting the significance of maintaining inflation at the two percent target.

His speech coincides with the Bank of Canada announcing success in managing high inflation, even though Canadians remain displeased with the increased prices across various sectors.

“Although it may seem counterintuitive, attempting to instigate a period of price declines would be painful for many Canadians,” stated Mendes in his prepared comments.

The deputy governor explained that the central bank would need to impose greater economic strain through high interest rates to lower prices, leading to an overall sense of financial decline for most individuals.

He also pointed out that creating a period of lower prices would impact people’s inflation expectations, making it challenging for the central bank to spur spending during an economic downturn.

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Mendes pointed out that achieving the two percent target would become more challenging as consumers, expecting prices to fall, postpone purchases, leading to businesses lowering prices and further encouraging delayed buying.

“Breaking free from a deflationary cycle of this nature can be exceedingly difficult,” he remarked. “Maintaining inflation at the two percent target helps mitigate these risks.”