August 25, 2018 / 4:33 PM / a year ago

BoC's Poloz says gradual approach appropriate in face of digital disruption

TORONTO (Reuters) - Taking a gradual, data-dependent approach to monetary policy can help manage risk to the inflation outlook in the face of economic uncertainties such as digital disruption, Bank of Canada Governor Stephen Poloz said on Saturday.

FILE PHOTO: Bank of Canada Governor Stephen Poloz listens to a question during a news conference in Ottawa, Ontario, Canada, July 11, 2018. REUTERS/Chris Wattie/File Photo

In prepared notes for a panel discussion at an economic symposium in Jackson Hole, Wyoming, Poloz said that digital disruption can be treated as a risk to the inflation outlook like any other.

Digitalization of the economy could raise aggregate supply and hold back inflation pressures or it could boost inflation as the economy approaches full capacity, he said.

This does not mean the central bank should keep interest rates unchanged until inflation pressures emerge because that would guarantee falling behind the “inflation curve,” Poloz said.

“It means following a more gradual approach to normalizing interest rates than traditional models would advocate.”

The central bank, which has a 2 percent inflation target, has raised interest rates four times since July 2017 to leave its benchmark rate at 1.50 percent. That is still well below its neutral rate estimate of between 2.5 percent and 3.5 percent.

Recent data showed that Canadian inflation surged in July to 3 percent, its highest in nearly seven years. But Poloz said on Friday that the rise was due to transitory factors.

One proxy for the digital economy, the computer system design and related services sector, accounts for about 2 percent of Canadian gross domestic product and has been growing by about 7.5 percent annually for the past five years, the central bank governor said.

While deployment of digital technologies will be very positive for economic growth its distribution will be uneven, Poloz said.

“The associated disruption means that some will lose out while others win,” he said. “We (policymakers) need to demonstrate that beyond the initial negatives are many positives, which are likely to dominate over time.”

Reporting by Fergal Smith; Editing by James Dalgleish

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