Bank of Canada: Negative rates lift bar on changing inflation target

OTTAWA (Reuters) - The Bank of Canada’s new estimation that it could take interest rates into negative territory if needed makes the bar even higher for changing the central bank’s existing 2 percent inflation target, Governor Stephen Poloz told Reuters on Friday.

The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie

The central bank and the Canadian government are due to renew the bank’s five-year inflation-targeting mandate by the end of next year.

The bank had previously estimated that it could not cut rates lower than 0.25 percent but it now believes its benchmark interest rate could go as low as minus 0.5 percent. It currently stands at 0.5 percent after two rate cuts this year.

Poloz said earlier this month that current circumstances did not warrant going to negative rates but that the ability to do so gave the central bank more room for maneuver.

He noted on Friday that the lower rate threshold “shifts the argument” around the inflation target.

“The odds of hitting the lower bound have obviously gone down if now you can go to minus 0.5 (percent). So it figures into that conversation but it’s not the only factor that we have to look at,” Poloz told Reuters in an interview.

“It’s model dependent, so we’ll be working on that for a while yet,” Poloz added.

Canada’s inflation target has been at 2 percent since 1995. The U.S. Federal Reserve and European Central Bank also have targets of 2 percent.

“It would be a high bar to change it and I think the learning that you can take interest rates lower than we thought before, makes the bar higher,” Poloz said.

The central bank head said that part of the context for considering whether to change the inflation target was the belief that lower trend growth and population growth mean that the level of interest rates that is consistent with full employment and stable inflation is also lower than it used to be.

Statistics Canada said on Friday the annual inflation rose less than expected in November to 1.4 percent.

Reporting by Leah Schnurr; Editing by James Dalgleish