UPDATE 1-Bank of Canada's Poloz eyeing global deflationary risk

Fri Apr 11, 2014 5:24pm EDT

Related Topics

* Poloz says watching deflation risk but encouraged by improving outlook

* Oliver eyes tax cuts, deregulation, labor market reforms

* Says deceased predecessor was admired internationally (Adds quotes, details and background)

By Louise Egan

WASHINGTON, April 11 (Reuters) - Policymakers are closely watching the risk of deflation in several advanced economies but they are encouraged by signs of a continuing improvements in the economic outlook, Bank of Canada Governor Stephen Poloz said on Friday.

While not talking specifically about Canada, where inflation has been below the central bank's 2 percent target for nearly two years, Poloz's comments shed some light on his thinking about a top concern domestically ahead of the bank's next interest rate decision on Wednesday.

"The risk of deflation is something that we all carry around when inflation is as low as it is," Poloz told reporters after a meeting of finance ministers and central bank governors from the Group of 20 leading economies.

"It's not that we fear deflation in the next moment. None of the real conditions that produce outright deflation, where all prices and wages are declining at the same time ... are present," he said.

"What we worry about is, when deflation is especially low, if there were another shock that came along that put more downward pressure on the economy, that would introduce the risk of a deflationary outcome."

Poloz suggested the worst-case scenario he described was becoming more distant.

"But the outlook continues to heal and to be giving us encouragement that we are on our way back home," he said, referring to the risk of deflation in Canada and elsewhere.

The central bank is unanimously expected to hold rates steady on Wednesday and investors will focus instead on how it describes the risks around weak inflation in its rate statement and its quarterly Monetary Policy Report to be released on the same day.

Inflation was 1.1 percent in February, within the bank's comfort zone of 1 to 3 percent but below its 2 percent target.

Canadian Finance Minister Joe Oliver, who attended his first international meeting since taking up his post on March 19, also flagged low inflation as a key risk to the global economy.

Turning to Canada, he would not say what tax cuts he would introduce after the Conservative government balances its budget in 2015.

Prime Minister Stephen Harper promised in 2011 to use the eventual fiscal surplus for tax reform, allowing couples with children to split the income of the highest earner to reduce their joint tax burden. With a surplus now in sight, Ottawa has stayed away from specifics.

"Some of the issues that you talked about and a number of others will be right at the top of consideration," he said, when asked to describe the tax cuts on the agenda.

"But as to what proportion would be represented by debt reduction, reduced taxes or government spending is of course what the budget will ultimately reveal," he said.

There are several structural reforms Canada will prioritize, he said, as part of the broader G20 commitment to boost global economic output by an extra 2 percent over the next five years.

His long list of changes included labor market reforms, tax reforms, reducing payroll taxes and capital gains taxes, deregulation of product markets to foster competition, and changes in regulation to boost trade.

Oliver's international debut as finance minister was marred by the death on Thursday of his predecessor, Jim Flaherty, prompting a special tribute at the start of the talks and expressions of condolences to the Canadian delegation.

"It quickly became obvious to me that he was as admired around the world as he was and is in Canada," said Oliver. (Reporting by Louise Egan; Editing by Andrea Ricci and Sandra Maler)

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