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Macklem Says Bank of Canada Can Ignore Wal-Mart Disinflation

The Bank of Canada should overlook slowing inflation (CACPIYOY) stemming from the arrival of large U.S. retailers such as Wal-Mart Stores Inc. (WMT) and focus on fighting tepid demand, Senior Deputy Governor Tiff Macklem said.

“The message from theory is that monetary policy should work to counter ‘bad’ disinflation stemming from weak demand,” Macklem said in remarks today at Concordia University in Montreal. Monetary policy should “look through ‘good’ disinflation from increased competition and improved productivity,” he said.

Inflation averaged 0.9 percent last year, slowing from 1.5 percent in 2012 to the slowest since 2009 when Canada’s economy was emerging from a recession. Macklem reiterated that the central bank expects inflation will return to its 2 percent target in about two years, as a recovering economy and a weaker dollar help absorb excess capacity and the effects of increased of competition wane.

“By clarifying that some disinflation is ‘good’ and will be tolerated, the speech throws a few droplets of cold water on hopes for a rate cut,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce in Toronto, wrote in a note to clients.

‘Determined in Markets’

Macklem said the recent weakening of the Canadian dollar may also boost some import prices, limiting the downward price pressure on goods like food, he said.

He reiterated the Bank of Canada does not have a target for the exchange rate.

“The exchange rate is determined in markets, and we neither promote any specific value for the Canadian dollar, nor thwart its movements,” he said.

The Bank of Canada has been “disappointed” by the “wedge” that has emerged between sluggish exports and rising global demand, Macklem said in response to an audience question.

“Our non-commodity exports they have actually been flat for the last couple of years, and that is a bit of a puzzle,” he said.

“As the U.S. economy picks up, that is the most powerful thing that will help our exports,” Macklem said. “The depreciation we have seen in the exchange rate will tend to re-enforce that, will make our exports a little more competitive.”

In the speech, Macklem said the reason Canadian inflation has slowed has yet to be explained in full. He cited weaker global price gains for food and energy, slack in Canada’s economy and retail competition.

U.S. Expansion

He pointed to U.S. merchants such as Wal-Mart and Target Corp. (TGT), which have expanded in Canada over the last year, shoppers who live near the U.S. border taking advantage of higher duty-free exemptions and Canadians shopping online more.

Macklem reiterated the bank’s policy stance from its Jan. 22 statement, which said the timing and direction of the next movement in interest rates will be determined by economic data.

The Canadian dollar held on to gains following publication of the speech. It was 0.3 percent stronger at C$1.1032 per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys 90.65 U.S. cents.

The impact of inflation from increased competition will have only a temporary impact on inflation, Macklem said, adding the central bank estimates it will continue to drive prices lower for about another year.

There is also evidence that persistent economic slack in the economy is having an impact on slowing inflation, but he said he can’t fully explain why price growth has been weaker than expected.

Other Factors

“In addition to economic slack, other factors must be causing disinflation,” Macklem said.

Policy makers last month kept their key lending rate at 1 percent and said the risks of inflation persisting below its 2 percent target have increased, which helped push the Canadian dollar to four-year lows.

The speech is Macklem’s last before he leaves the central bank May 1 to become dean at the University of Toronto’s Rotman School of Management starting July 1. Macklem expressed interest in the post of governor before Stephen Poloz was appointed to the job in June.

To contact the reporters on this story: Theophilos Argitis in Ottawa at; Greg Quinn in Montreal at

To contact the editor responsible for this story: Paul Badertscher at

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