Canada economists less worried by low inflation than central bank

OTTAWA (Reuters) - Canadian economists are not too concerned about low inflation, Finance Minister Joe Oliver said after meeting several of them on Monday, sending a different message than the one sounded recently by Bank of Canada Governor Stephen Poloz.

Overall inflation rose to the central bank’s 2 percent target in April, but Poloz said last week that underlying inflation is still at a low 1.2 percent, which leaves Canada “vulnerable to a downside shock at any time”.

Asked about an apparent divide between the economists and the Bank of Canada, Oliver said: “I’m not going to delve into an area which is the responsibility of the Bank of Canada, but I can say that the private-sector economists are certainly not worried about high inflation. If there is a risk, it would be on the downside, but they are not too concerned about that risk.”

The issue is significant because the central bank has cited low inflation, and the risk of it falling, as a reason not to raise interest rates.

Two of the economists who met Oliver on Monday, and spoke to reporters later, echoed his remarks about not being concerned about low inflation, though a third, Sebastien Lavoie of Laurentian Bank Securities, said he agreed with the Bank of Canada’s tone.

Bank of Montreal chief economist Doug Porter said he thought the central bank should have changed its tone in its June 4 rate statement, when it said “the downside risks to the inflation outlook (were) as important as before”.

“It’s perplexing to the average person that the Bank of Canada, I would suggest, is concerned about low inflation when we see record-high gas prices and 2 percent headline inflation, and some food components that are rising quite quickly,” he said, speaking in the lobby of the Finance Department building.

“I think they do risk a bit of credibility with...the person on the continuing to drum on about how their biggest concern is low inflation when we’ve effectively got 2 percent inflation.”

Porter said one of his bigger concerns is just how strongly prices for oil, natural gas and gasoline have risen, catching many flat-footed.

TD Bank chief economist Craig Alexander sees overall inflation possibly dipping back below 2 percent in the near future. But he said he sees core inflation, which was 1.4 percent in April, gradually rising to the central bank’s target.

“I don’t see inflation moving meaningfully downward, nor do I actually see it heading well above the Bank of Canada target for the foreseeable future,” he said.

Laurentian’s Lavoie, on the other hand, cited “lowflation” as a key risk facing the Bank of Canada and central banks around the world, saying inflation expectations may fall and prove hard to resurrect.

“The still to the downside, and I tend to agree, actually, with the tone of the bank that was set a few weeks ago,” he said, noting, however, that Canada does not face a significant risk of deflation, in contrast to the euro zone.

Editing by Peter Galloway