Gita Gopinath says the Bank of Canada’s strong track record on inflation has bought it some wiggle room to manage the current scare. It may need it.
“Central bankers have some very tough decisions to make,” the International Monetary Fund’s chief economist said in an interview.
“If there is a real risk of inflation expectations de-anchoring, of losing credibility of your monetary policy framework, I think in that case, there would be an argument to move pre-emptively [and raise interest rates],” she said. “But for countries where we have credible central banks – and Canada is certainly one of those – you can take a more studied approach, a data-driven approach.”
Ms. Gopinath sat down for a one-on-one interview (via Zoom) shortly after unveiling the IMF’s latest twice-annual World Economic Outlook – which included a setback in 2021 growth expectations, owing to the rise of COVID-19′s Delta variant and pervasive global supply chain disruptions. The report dedicated an entire chapter to inflation and what policy makers may need to do about it – a problem that the IMF hadn’t fully appreciated in the earlier stages of what is proving a hard-to-predict global recovery.
“This is a very, very unique recovery – unlike anything we have ever seen before,” Ms. Gopinath acknowledged.
On that front, the IMF praised the Bank of Canada for its early action last year to reduce government bond purchases under its quantitative easing program. The report cited the policy action as an example of how central banks “should be prepared to act quickly if the recovery strengthens faster than expected.”
“Early pre-emptive action will be required where there is a tangible risk of rising inflation expectations and more persistent price increases,” the IMF cautioned.
It’s important for central bankers not to prematurely tighten monetary policy and “kill the recovery,” Ms. Gopinath elaborated. “But at the same time, it’s important to be very vigilant about what’s happening to inflation statistics – and, therefore, to provide sufficient forewarning for how you are going to act in these next several months. Any small turbulence in monetary policy, the whiff of that can have large effects on financial markets.”
While inflation is now very much on the IMF’s radar, Ms. Gopinath still expects inflation globally to cool to prepandemic norms “by the middle to the second half of next year.” And she’s quick to note that this is far from being a global problem. It’s an issue for some developing countries and a handful of advanced economies (the United States, Britain, Canada), but largely a non-event in Japan and the European Union.
The bigger concern at the top of the IMF’s economic priority list, one with global implications, is the uneven distribution of COVID-19 vaccines.
High vaccination rates have been the key to the strong economic rebounds in Canada and may other advanced markets, but they continue to hold back the recovery in large numbers of developing and emerging countries. More than half the countries of the world, representing 35 per cent of the global population, are on track to fall short of the IMF’s target of 40-per-cent vaccination by the end of this year – a rate that’s nowhere near the 72 per cent that Canada has already achieved.
“[Canada] has done extremely well on vaccination rates, and now it is also benefitting from the rebound in commodity prices that we have seen around the world. And [policy makers] gave considerable policy support all through last year and this year,” Ms. Gopinath said.
The IMF cut its Canadian growth forecast for 2021 to 5.7 per cent from 6.3 per cent, which, Ms. Gopinath said, stemmed from the supply chain disruptions that have resulted in “a significant drop in real exports” beginning in the second quarter. But the IMF raised its 2022 forecast for Canada to 4.9 per cent from 4.5 per cent, evidence that it expects growth to bounce back from the current setback.
Now, she said, it’s critical for the global recovery that Canada and other vaccine-rich countries step up their efforts to accelerate vaccine distribution in parts of the world where vaccination rates are lagging.
The IMF cited continued pandemic outbreaks as a key contributing factor to the supply chain bottlenecks that are holding back the recovery and fuelling price increases. It estimates that if COVID-19′s economic effects were to be allowed to linger over a “prolonged” period, it could reduce global gross domestic product by a cumulative $5.3-trillion over the next five years.
“What [vaccine] surplus nations can do is, basically, step out of the queue, and maybe move a couple of steps back. Which is to basically agree with vaccine manufacturers to prioritize deliveries to COVAX and to AVAT,” Ms. Gopinath urged, referring to the vaccine agencies of the World Health Organization and the African Union, respectively. “We’ve done the calculation – even if you decide to give booster shots to your population between now and the end of the end of this year, there are enough excess vaccine doses that have been ordered, by countries including Canada.”
“Canada has pledged vaccine donations of about 40 million to be delivered this year. So far, 2.7 million doses have been delivered. ... Even with booster shots being provided, they certainly have the ability to provide the additional doses that they pledged.”
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