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Bank of Canada says pandemic to test inflation expectations

FILE PHOTO: Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa, Ontario, Canada June 22, 2020. REUTERS/Blair Gable

OTTAWA (Reuters) - The economic shock from the coronavirus pandemic will test public confidence in the Bank of Canada’s 2% inflation target, a senior official at the bank said on Tuesday.

Deputy Governor Lawrence Schembri said Canadians’ faith in the ability of the bank to keep inflation close to 2% had allowed it react effectively at the start of the crisis by cutting rates three times to record low levels.

“While we have benefited from having well-anchored inflation expectations in the past, this mooring will be tested by the very rough economic waters caused by the pandemic,” Schembri told a business audience, without elaborating.

Schembri said people would shrug off temporary movements in inflation if they believe it was set to remain on track in the long run. Public confidence in the target, Schembri noted, meant the bank’s decision to cut rates had had more of an impact.

“If inflation expectations had not been well anchored, the reduction in our policy interest rate would have had less impact. Consequently, more monetary stimulus would have been necessary,” he said, without giving details.

But the average consumer thinks they are facing higher inflation than what has been announced, a gap that has become more pronounced during the pandemic and should be acknowledged by policy makers, Schembri noted.

The 2% inflation rate target is jointly reviewed by the central bank and the government of Canada every five years. The current target is set to expire in December 2021.

On Monday, the bank announced it had launched an online survey asking Canadians to provide feedback on its inflation targeting framework. The online survey marks the first time the bank has sought public input about the target.

Reporting by Kelsey Johnson; Additional reporting by David Ljunggren; Editing by Steve Orlofsky

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