(Bloomberg) -- Bank of Canada Deputy Governor Tim Lane said the central bank will look through any temporary inflationary impacts of carbon pricing, though moving to a low-carbon economy could have monetary policy implications down the line.
“The introduction of carbon pricing itself will have a transitory effect on inflation”, according to the prepared text of a speech he will be giving in Montreal. “Since this effect is due to a one-off structural change, we look through it in making monetary policy -- just as we have looked through the transitory effect of lower oil prices in the past couple of years.”
Lane's speech is the first by the Bank of Canada on the issue, and comes as Prime Minister Justin Trudeau presses provinces to move ahead with carbon pricing schemes. Recent measures by some provinces already seem to be having an impact on consumer prices, with inflation rising to the highest in more than two years.
Alberta added a 4.49 Canadian cent-per-liter carbon levy on Jan. 1 and consequently reported one of the biggest increases in gasoline prices, up 15 percent during the month. Ontario has also introduced a new cap and trade system.
Lane said the nation's economy is resilient enough to adjust to a low-carbon economy, much like it did during the past oil shock, and citing flexible exchange rates, adaptable labor markets, and Canada's strong financial system.
“The same factors that have made Canada resilient to the oil shock should serve us well as this adjustment proceeds,” Lane said, adding more profound structural changes will have implications on both supply and demand that policy makers “will need to consider carefully as we conduct monetary policy.”
Not acting however poses other risks -- such as frequent adverse shocks -- that would also need to be factored into the central bank's risk management framework.
To contact the reporter on this story: Theo Argitis in Ottawa at targitis@bloomberg.net.
To contact the editors responsible for this story: Theo Argitis in Ottawa at targitis@bloomberg.net, Chris Fournier
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