RBC CEO warns ‘persistent inflation’ is building, disputes central bank forecasts

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Royal Bank of Canada chief executive Dave McKay says “persistent inflation” is building up and some CEOs disagree with central bankers’ assurances that current high inflation rates should be temporary.

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Even as Canadian employment has returned to levels seen before the COVID-19 pandemic, employers still face labor shortages that are pushing up wages, Mr Mackey told the Institute of International Finance (IIF) said at a virtual event.

Productivity has slowed in some sectors, he said, and as new jobs are created in emerging sectors, existing jobs are not being filled or replaced at the same rate.


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“I would say there is persistent inflation building up,” said Mr. McKay, which is “more permanent… than temporary. But it is a major disagreement between central bankers and CEOs who see the world quite differently. Huh.”

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Last week, Bank of Canada Governor Tiff McCalem said higher inflation could be “slightly more persistent” than the central bank, and that the economic recovery could be slowing. But he still said the current spike is the result of temporary factors, such as supply-chain disruptions and year-over-year price comparisons.

Inflation hit an 18-year high of 4.1 percent in August, and has exceeded the central bank’s target rate of 1 percent to 3 percent since April. The International Monetary Fund (IMF) said this week that it expects high inflation to ease in most advanced economies by the middle of next year, but central banks need to be “cautious” about the possibility that supply -Series issues may still be major inflation.

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Mr McKay said although the prospects for economic recovery still looked “choppy and uncertain”, he was optimistic. In the near term, he said supply-chain issues keeping containers in ports and public-health restrictions that leave restaurants half empty are stifling spending, delaying demand.

But a central disconnect between some CEOs and central bankers stems from their differing expectations of how — and how quickly — consumers and businesses can spend the vast piles of extra cash deposited into deposit accounts during the COVID-19 pandemic.

Canadian consumers typically have about $40 billion in cash accounts, but they now have $310 billion combined. Add to that additional business deposits and at least $500 billion in cash “just sitting there waiting to be spent, unable to spend,” he said. “That’s 25 percent of Canada’s GDP.”

Banks are closely monitoring those deposits to see how much is moving into investment accounts, to pay off debt or is spent on goods and services.

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“Central bankers think it’s going to be a decade” [before that excess cash is fully spent], and it’s largely going to pay off the debt first. Corporate CEOs think that it will get consumed and hence create demand,” said Mr McKay. “And the balance between those two avenues, I think, is one of the biggest drivers of where we’re going to come out on the inflation rate and the growth rate.”

At Wednesday’s IIF event, Fidelity International CEO Anne Richards said “there is clearly a lack of demand,” but she is wary that the pandemic will leave lasting scars that affect people more than risk-taking.

“If you’ve been bitten by a shark, you’re all the more nervous to swim again, even if it’s at a local pool. … And if you’ve been through a global pandemic, it’s the animal spirits of society at large.” “I think it makes it a more complicated growth pattern here than just saying, there’s a bunch of cash in there, a lot of demand, we’re off to the races. I don’t think it’s that easy.”

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