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.

Just Posted

Weekend revellers keep Sooke police busy

Mounties respond to 68 calls for service

Supreme Court rules residents in Victoria social housing deserve tenant rights

Tenants trying to stabilize their living situations should not face less legal rights than those paying market rates: Judge

Weapons and drugs could lead to 29 charges against Victoria man

VicPD found a cache of weapons, drugs and counterfeit money

Oak Bay set to turn up the heat on beach picnics

Committee of the whole makes unanimous recommendation to allow portable bbqs at local beaches

Victoria Cool Aid Society invites you to their Homecoming

Event celebrates 50 years of social services across Greater Victoria with fundraiser to keep programs running

Film Review: On Chesil Beach

Saoirse Ronan continues to shine in adaptation Ian McEwan novel about young newlyweds on their wedding day

B.C. invests $115M to create 200 new nurse practitioner jobs

Health Minister says 780,000 B.C. residents don’t have a family doctor

Union calls on prime minister to step into ‘stalled’ Phoenix compensation talks

For more than two years, thousands of federal workers have been affected by Phoenix system

Judge: President Trump can’t block critics on Twitter

The judge had suggested that Trump mute rather than block some of his critics

NFL owners adopt new policy to address anthem protests

Commissioner Roger Goodell said the change was approved unanimously by owners

Film Review: On Chesil Beach

Saoirse Ronan continues to shine in adaptation Ian McEwan novel about young newlyweds on their wedding day

Unicyclist starts his cross-Canada trip in Vancouver

Taylor Stark started his journey May 7

B.C. patients lost nearly $500,000 due to medical wait times: report

Fraser Institute report shows Canadians as a whole lost $1.9 billion

BC Seafood Festival competition line-up announced for Island event

Top international and local celebrity chefs and oyster shuckers will be leveraging… Continue reading

Most Read