The Bank of Canada building is pictured in Ottawa on September 6, 2011. File photo by THE CANADIAN PRESS

Bank of Canada cautious of future rate hikes

The Bank of Canada remains cautious on future rate hikes due to low- inflation risk

The Bank of Canada remains cautious about future rate hikes as it measures the risk posed by low inflation that continues to fall short of the central bank’s two per cent target, senior deputy governor Carolyn Wilkins said Wednesday.

“Just three weeks ago, the bank decided to leave the policy rate unchanged. We said at the time that while less monetary policy stimulus will likely be required over time, governing council will be cautious in making future adjustments to the policy rate,” Wilkins said in remarks made in New York.

“One of the motivations for caution is that inflation has been in the lower end of the inflation target bands of one to three per cent for quite some time.”

Inflation in Canada slowed over the first half of this year and remained in the lower half of the Bank of Canada’s target range even as the economy grew quickly.

Caution, however, has its limits in times of uncertainty, Wilkins added, including those related to monetary policy and financial stability.

“Whether it is about how aggressive or how cautious policy should be — getting the dosage right demands sound judgment about complex trade-offs,” she said.

“And, like many businesses and households, central banks have established techniques to reduce, where possible, the level of uncertainty they experience.”

Speaking before the Money Marketeers of New York University, Wilkins said the central bank is particularly focused on data that indicate how wages and potential output are progressing, as well as the effects of the two interest rate increases made over the summer. The bank is also following NAFTA negotiations closely.

While higher household debt has likely heightened the sensitivity of spending to interest rate increases, Wilkins said it is difficult at this time to know by how much. There is also uncertainty about the interaction of interest rate increases with the recent tightening of macroprudential rules.

To understand how the bank factors uncertainty into its policy decisions, Wilkins paralleled a scenario involving business people considering large capital expenditures who have the option value of waiting until they are more sure of the returns.

“As with investment, fixed costs of changing policy direction may explain a central bank’s aversion to reversals and motivate a wait-and-see approach to policy,” she said.

That said, she added, it’s unclear how costly policy reversals are for the real economy.

“It is possible that the perceived costs are self-reinforcing because reversals are so rare that they are viewed as policy errors when they do occur, rather than as a sensible reaction to new information.”

The Canadian Press

Like us on Facebook and follow us on Twitter.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Comments are closed

Just Posted

Infringing festival finds a way to dance during pandemic

Crimson Coast Dance Society holding drive-in, micro and physically distanced events July 10-19

Nanaimo sees Island’s first nurse practitioner primary care clinic

Nexus Primary Care Clinic opened in late June in south end

Nanaimo RCMP ask for help finding missing 19-year-old

Haley Murphy has not been seen since Tuesday, June 30, say police

Learning outside the classroom suits VIU’s carpentry program just fine

Vancouver Island University has partnered with KSG Consulting Ltd. to provide hands-on learning

Nanaimo chef the Sensitive Vegan takes tongue-in-cheek approach to serious cooking

Jesse Rubboli creates cassava-based recipes and shares them via YouTube and on social media

B.C. accommodators need phone lines to light up as in-province travel given green light

Travel restrictions during the COVID-19 pandemic have decimated the tourism and hospitality industries

300 Cache Creek residents on evacuation alert due to flood risk as river rises

Heavy rainfall on Canada Day has river rising steadily, threatening 175 properties

First glimpse of Canada’s true COVID-19 infection rate expected mid-July

At least 105,000 Canadians have tested positive for COVID-19 since the coronavirus was identified

Annual music event in Comox Valley celebrates online instead

Vancouver Island MusicFest holds virtual celebration set for July 10

Police ramp up efforts to get impaired drivers off B.C. roads this summer

July is dedicated to the Summer CounterAttack Impaired Driving Campaign

Migrant workers stage multi-city action for full status amid COVID-19 risks

‘COVID-19 has exacerbated an existing crisis’

Okanagan school drops ‘Rebels’ sports team name, citing links with U.S. Civil War

Name and formerly-used images “fly in the face” of the district’s human rights policy, says board chair

PHOTOS: B.C.’s top doc picks up personalized Fluevog shoes, tours mural exhibition

Murals of Gratitude exhibit includes at least one portrait of Henry alongside paintings of health-care workers

Most Read