February 15, 2018 / 6:53 PM / 4 months ago

UPDATE 2-Bank of Canada balancing caution, inflation pressures

(Recasts with comments on cautious policy)

By Rod Nickel

WINNIPEG, Manitoba, Feb 15 (Reuters) - The Bank of Canada’s cautious approach to further rate hikes does not mean rates will stay low forever, as policymakers also have to weigh inflationary pressures, Bank of Canada Deputy Governor Lawrence Schembri said on Thursday.

Striking a balanced tone in response to audience questions about interest rates, Schembri noted uncertainties such as the renegotiation of the North American Free Trade Agreement and recently implemented tighter mortgage rules.

At the same time, the bank remains data-dependent, he said.

“There’s a balance between the two - being cautious and recognizing that there’s important uncertainties facing the Canadian economy, but at the same time recognizing and monitoring inflationary pressures and how they develop,” Schembri said after a speech on the bank’s inflation targeting framework.

The Bank of Canada has raised rates three times since July 2017 and has said less monetary policy stimulus is likely going to be required over time, but maintains it will be cautious and watch incoming data as it considers more hikes.

In his speech, Schembri said monetary policy might have to be more aggressive to boost confidence and increase demand at a time when fundamental forces are weighing on economic growth.

Schembri said ongoing temporary shocks make it impossible for the central bank to hit its 2 percent inflation target consistently.

While the central bank’s inflation targeting regime works well and inflationary expectations remain firmly anchored, several trends happening in advanced economies could pose a challenge to the framework, Schembri said.

The underlying growth in the economy is expected to remain low or slow further, due in part to lower labor force growth and declining labor productivity growth, he said.

“Therefore, the cyclical forces that normally help to propel an economy out of an unexpected downturn, namely business and residential investment as well as purchases of large durable goods, may be less powerful, especially if debt levels are high and confidence is slow to rebound,” Schembri said.

“In such circumstances, policy might have to be more aggressive to boost confidence and increase demand,” Schembri said in prepared notes for a speech to the Manitoba Association for Business Economists.

He also noted that higher levels of household and public debt in advanced economies could pose a challenge to the central bank’s framework, while a gradual decline in interest rates reduced the scope of central banks to adjust their policy rate. (Additional reporting by Andrea Hopkins and Leah Schnurr; editing by Ian Simpson and Susan Thomas)

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