By Julie Gordon and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada will likely need to lower rates to their effective lower bound (ELB) more often in the future and will therefore have to use alternative stimulus to a greater extent to tackle shocks, Governor Tiff Macklem said on Wednesday.
Macklem, in a virtual speech to a business audience, said the low global interest rate environment meant the bank would have to rely on tools like forward guidance and quantitative easing more often going forward.
“A lower neutral interest rate means we are likely to need to use these policy tools more often in the future. These alternative tools work, but we don’t have as much experience using them,” he added.
The Bank of Canada in March 2020 slashed its benchmark rate to 0.25%, a record low and the current ELB, as the coronavirus pandemic took hold. It also launched its first-ever quantitative easing program and said rates would stay low for a prolonged period.
Macklem said forward guidance – essentially committing to holding rates low for longer – could be used under certain circumstances to support employment and return inflation to target, though it has drawbacks.
“An implication of exceptional forward guidance is that inflation will likely go a little above the target after we exit from the ELB before it comes back to the target over the medium term,” he said.
Canada’s inflation rate was at an 18-year high at 4.7% in November, data showed on Wednesday, its eighth straight month above the central bank’s 1-3% control range.
The Bank of Canada, which says it expects the inflation rate to sink back down towards 2% by the end of 2022, has signaled it could start hiking rates as soon as April. Money markets expect a first hike in March or April. [BOCWATCH]
The Canadian dollar steadied at about 1.2915, or 77.43 U.S. cents, to the greenback after the speech, down 0.4% on the day.
(Additional reporting by Fergal Smith in Toronto; Editing by David Gregorio)
