According to Stephen Poloz, former Governor of the Reserve Bank of Canada, there is currently no danger of an imminent and definitive recession in the United States. Stephen Poloz explains inflation expectations and why the price of gold, an inflation hedge, has failed to take off.
Stephen Poloz: Recession is not inevitable
There is still time to “normalize the economy” and avoid a recession, says Stephen Poloz, 9th Governor of the Bank of Canada and he thinks there is still an important window to normalize the situation. During this time, until the outbreak of Covid-19, Canada saw steady GDP growth in low single digits, low unemployment and inflation close to the Bank’s 2% target level.
Some financial institutions agree with Stephen Poloz’s view on the impending US recession. Poloz’s comments came as Goldman Sachs released a report this week stating that a recession is not inevitable in the next two years.
Polo, like Powell, says ‘temporary’ for inflation!
On inflation in Canada, Poloz says it’s “temporary” in the sense that it will eventually dissipate. He notes that the term ‘temporary’ in an economic sense does not mean that consumer prices will normalize soon after they rise, only that inflation will eventually stop rising. As of April, Canada’s latest Consumer Price Index (CPI) stands at 6.8%, a 30-year high. Poloz explains:
I think that most of the inflation we observe is technically temporary and will disappear in the next time. I would say 12 months, maybe a little longer, depending on what happens with oil prices because of Russia and Ukraine.
predicting that the inflation rate in Canada will eventually be close to the Bank of Canada’s 2% target, Stephen Poloz says:
In modeling how inflation works today, We will return to 2%, provided expectations remain fairly stable. It will take some time, but that’s okay. Moving on, we don’t have to go through a recession to do this. This is my best scenario.
“Most inflation is ‘external’ and not under central bank control”
Poloz, most of the inflation Canada currently has He adds that it is ‘external’ and not entirely under the control of the central bank. Noting that there will be rising commodity prices such as crude oil, as an external force, Poloz states that oil prices of $120 can almost cause recession alone.
As reported in Cryptokoin.com news, there is consensus that the Bank of Canada should raise interest rates by 50 basis points at Wednesday’s meeting. Poloz says this alone may not be enough to cause a major crash in the Canadian housing market, explaining it this way:
Once interest rates return to normal, the housing market is doomed to slow down. But I can say that there is really important ground under it. Immigrant levels are extraordinarily high, with over 400,000 new arrivals this year. This is sure to add significant grounding to the Canadian housing market. Who can really say whether this prevents correction in some prices, in some overheated markets.
Stephen Poloz: This is why the gold price is not trading high
Regarding precious metals, Poloz believes that markets will normalize at the end of inflation, so gold states that the price is not trading as high as some investors expected.
“I think what this shows us is that inflation expectations around the world have stabilized pretty well,” said Poloz. “Is inflation really starting to rise?” He states that he started to ask questions such as: and they expect a careful explanation from the central banks about what is going on and what they are doing about it.
“In this context, I would not expect the gold price to rise”
According to Poloz, both the rising interest rates and the factors affecting these expectations There’s quantitative tightening (QT) helping to support them, and over the next 12 months, a steady downward trend appears in headline inflation figures. Poloz makes the following prediction for gold:
I think this will put a lot of people at ease. And in this context, I would not have expected the gold price to rise. Because, despite this swelling we all see, the long-term inflation outlook will remain intact.
“You can’t expect the price of gold to jump up!”
Poloz adds that the hedging properties of gold are not short-term in nature, and the fact that the price does not follow the CPI on a monthly basis does not mean that it will not protect gold from inflation in the long run against rising costs. Finally, Poloz makes the following assessment:
Because the price of oil has doubled, you cannot expect the price of gold to jump suddenly to compensate the gold owners. This is not what we mean when we say hedge against inflation risk.
