Bank of Canada Governor Stephen Poloz defended the use of inflation targets on Tuesday and reiterated that policymakers will be cautious about future interest rate moves even as encouraging signs of wage growth show up.
With two rate hikes behind him, Poloz said the central bank had a good understanding of what is driving inflation and would be comfortable with missing its 2 percent inflation target on the upside as well as the downside, as long as it was temporary.
In a speech and news conference in Montreal, Poloz maintained a neutral tone on the next rate move, repeating the bank’s message that it was monitoring wage growth and inflation, as well as economic capacity to see how the economy was adjusting to rate hikes in July and September.
Financial markets had expected a more dovish message, but Poloz offered no clues as to whether the bank will hike rates again in December or wait until 2018. Markets had been surprised by the second hike in September.
“It was very balanced … the Canadian dollar weakened quite a bit into it, I think people were maybe hoping for something dovish but I think in the end it was quite balanced,” said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.
Poloz warned the closer Canada gets to full output and employment the greater the risk inflation pressures will appear, and repeated his message that less stimulus will be required over time.
He said the October jobs data showed encouraging signs of wage growth, but said slack remained in the labor market and it was too early to say it was the beginning of an uptrend.
“A lot of pieces need to fall into place before we can be certain that the economy has made it all the way home,” Poloz said in the speech.
Poloz defended the bank’s decision to raise rates despite inflation remaining below the 2 percent midpoint of its target range, and later told reporters the bank was open to allowing inflation to overshoot the target after a period of undershooting it – at least in the short term.
“Even though we’d still be aiming for 2 (percent)…the actual trend in inflation would have to be heading above 2 by our forecasts for that to be an issue for policy,” Poloz said.