CALGARY - Keeping inflation in check is vital if Canada is to reap the benefits of soaring commodity prices, Bank of Canada governor Mark Carney said Thursday, as he sought to explain the rationale behind last week's controversial decision to keep interest rates steady.
Hearkening back to the last commodities boom of the 1970s - and the crash that followed - Carney said the bank needs to keep a "relentless focus" on achieving its inflation target of two per cent.
"We are experiencing a commodity super cycle," Carney told a conference in Calgary Thursday night.
"In the face of one of the largest commodity-price shocks in our lifetimes, we cannot be complacent."
He said the scale of price increases has never been higher and that a broader range of commodities is being affected than in past booms.
"Since 2002, grain and oilseed prices have more than doubled, base metals prices have tripled, and oil prices have quadrupled," said Carney, the 43-year-old former investment banker who took the helm of the central bank in February.
"The current boom is also unusual in that it began earlier in the global economic cycle."
On June 10 the Bank of Canada decided to hold its overnight interest rate steady at three per cent - a move that surprised many economists who were expecting a cut of a quarter of a percentage point.
The bank had indicated in April that "some further monetary stimulus will likely be required" in its future rate decisions, but that "any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada."
While Carney was criticized in some corners for his about-face on interest rates, he told reporters Thursday that the bank does "not conduct monetary policy by using code words.
"This is not a question of what people think we say we're going to do. But it's a question of what we ought to do to fulfil our mandate. And that is proper transparency and communication."
He said a 10 per cent increase in commodity prices since April was enough of a reason for the Bank to change its view.
"As a result the bank now judges that the current accommodative stance of monetary policy is appropriate to bring aggregate demand and supply into balance and to achieve the two per cent inflation target," Carney said.
"Going forward there remain important downside and upside risks to inflation, but these risks are now judged to be evenly balanced."
Statistics Canada said Thursday Canada's inflation shot past the two per cent level for the first time in four months in May, as rising gasoline prices boosted the annual rate a half-point higher to 2.2 per cent.
The Bank of Canada expects prices in commodities like oil, natural gas, coal and wheat to remain at high levels.
"The demand and supply fundamentals... give reasons to expect firm commodity prices, but not necessarily persistent - let along accelerating - commodity price increases," Carney said.
The key is to avoid the pitfalls of monetary authorities in the 1970s - the last time commodities rose to such a degree. Interest rates were slashed while it was assumed our growth would continue indefinitely. Carney said that mentality, in large part, led to the 1981 to 1982 recession.
"The damage to inflation expectations meant that inflation would remain a real and present danger for years," Carney said.
