A cautious approach to monetary policy may be prudent during times of uncertainty like today, but caution has its limits because the trade-off can be financial instability, Bank of Canada Senior Deputy Governor Carolyn Wilkins said on Wednesday.
Explaining how uncertainty affects decision-making at the bank, Wilkins said policy may respond to negative shocks more aggressively when interest rates are low, but a cautious approach is prudent when it is not clear how rate moves will affect spending.
“Going forward, uncertainty isn’t a reason for paralysis in decision making, but it is a reason to think about things carefully,” Wilkins said in response to a question after her speech to the Money Marketeers of New York University.
The Bank of Canada raised rates in back-to-back moves in July and September but policymakers have since said that while less stimulus will be required over time, they will be cautious as they consider future rate moves.
Wilkins said the bank is particularly focused on data that indicate how wages and potential output are progressing, as well as the effects of the rate hikes and the renegotiation of the North American Free Trade Agreement.
“Another reason for caution – in this case more of a ‘wait and see’ approach – is related to a desire to avoid having to reverse policy direction abruptly in the future,” Wilkins said in her speech.
Asked whether the bank would allow the economy to run hot to allow inflation to pick up, she said the idea is not part of the bank’s 2 percent inflation target.
“It’s not really about running the economy hot or not, it’s just what happens when you get the virtuous circle of growth,” Wilkins said.
“It’s not something you would want to build in your base case because if it doesn’t happen then you’ve got risks on the upside to inflation but it’s something you want to take on board and watch in terms of your assessment of the risks around your inflation forecast.”
Amid criticism that the bank surprised markets with its second rate hike, Wilkins also said the bank would adjust the way it communicates by having members of the Governing Council provide economic updates in speeches between the quarterly Monetary Policy Reports, and hold news conferences after those speeches, beginning in 2018.
Some observers had believed the bank was more inclined to move rates when it had a news conference to explain its decision.