Bank of Canada says inflation still too high, but moving in right direction

People gather supplies at a grocery store amid coronavirus fears spreading in Toronto,

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) -Inflation in Canada remains "too high" but is headed in the right direction, a Bank of Canada official said on Tuesday, adding that the central bank will do whatever is needed to bring price increases back to target.

Deputy Governor Paul Beaudry, speaking to university students in Waterloo, Ontario, said while some have suggested a recession might be needed to tame climbing prices, the central bank believed it could lower the risk of a hard landing by clearly communicating its intentions.

"In August, inflation stood at 7%. While we're headed in the right direction, that's still too high," Beaudry said in prepared remarks provided ahead of the speech.

"We will continue to take whatever actions are necessary to restore price stability for households and businesses and to maintain Canadians' confidence that we can deliver on our mandate of bringing inflation back to 2%," he added later.

Inflation slowed again in August, though both headline and core measures remain far above target. Adding to the pinch for consumers, grocery prices rose at their fastest pace in 41-years.

Central banks are concerned people may start to assume inflation will continue to rise faster than target, which could lead to price spirals.

While some have argued policymakers need to engineer a recession to avoid this, Beaudry said the bank is working to convince Canadians the current period of high inflation is temporary and it will tame surging prices.

"Our messages are designed to cut through the noise," said Beaudry. "The more effective the Bank can be in its guiding role, the greater the chance of a soft landing - and the lower the risk of a hard landing."

Still, economists said if consumer and business surveys due out next month show inflation has become more entrenched, the Bank of Canada may have to change its tune.

"The pace of increases clearly shows that if the central bank has to make a choice between avoiding a recession and controlling inflation, they will choose the latter every time," said Royce Mendes, head of macro strategy at Desjardins Group, in a note.

The Bank of Canada has boosted its policy rate by 300-basis points in six months and earlier this month signaled it was not yet done. Money markets are betting on another 50-bp increase in October to 3.75%.

The Canadian dollar was trading 0.8% lower at 1.3360 to the greenback, or 74.85 U.S. cents.

(Reporting by Julie Gordon and David Ljunggren in Ottawa; additional reporting by Fergal Smith in Toronto; editing by Richard Pullin)