CORRECTED-Bank of Canada: monetary policy should ignore competition-caused disinflation

Fri Feb 7, 2014 4:01pm EST

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(Corrects word in first paragraph to say "disinflation", not "inflation")

OTTAWA Feb 7 (Reuters) - The Bank of Canada signaled on Friday a willingness to ignore the part of Canada's low inflation rate that is caused by intense retail competition, saying that for monetary policy purposes this was "good disinflation" and likely transitory.

Tiff Macklem said in his final scheduled public speech as the central bank's senior deputy governor that the bank believes chronically weak inflation in Canada reflects both increased competition by retailers and excess slack in the economy, with only the latter considered "bad".

"And as we observe disinflation across a number of advanced economies, the message from theory is that monetary policy should work to counter 'bad' disinflation stemming from weak demand, but look through 'good' disinflation from increased competition and improved productivity," he said in the prepared text of the speech that discussed at length the forces at work on Canadian prices.

Macklem also sought to dispell a perception among some market players that the bank is seeking to weaken the Canadian dollar with recent dovish remarks.

"In light of the recent depreciation of the Canadian dollar, it bears stressing that the bank does not have a target for the exchange rate - it has an inflation target. The exchange rate is determined in markets, and we neither promote any specific value for the Canadian dollar, nor thwart its movements," he said.

Macklem repeated the bank's Jan 22 guidance on interest rates, saying "the timing and direction of the next change in the policy rate will depend on how new information influences this balance of risks." (Reporting by Randall Palmer; Editing by Louise Egan)

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