Rising potential output gives Bank of Canada ‘bit more room’

By Leah Schnurr and Andrea Hopkins

OTTAWA (Reuters) – An upward revision to the Bank of Canada’s projected growth rate of potential output gives the central bank “a bit more room” than previously thought to support demand without sparking excessive inflation pressures, a top official said on Wednesday.

Deputy Governor Lawrence Schembri said the Bank of Canada is closely monitoring the expansion in economic capacity, with the economy now operating close to potential.

“The higher the projected growth rate of potential output, the faster the economy can grow without inflation rising persistently above our target,” Schembri said in notes for a speech to the Ottawa Economics Association and CFA Society Ottawa.

“That means that, in the near term, we have a bit more room than we thought to support demand without sparking undue inflationary pressures,” Schembri said.

The bank in April boosted its estimate of Canada’s potential output growth, both in terms of level and rate of growth, and held official interest rates steady after three rate hikes since July 2017. More rate hikes are expected this year.

While the Great Recession had a severe impact on potential output, strong demand in an economy near capacity has spurred business investment, corporate growth and improved job market conditions, which are repairing that damage, Schembri said.

“It will help guide us in achieving our goal of low, stable and predictable inflation, which is the best contribution monetary policy can make to support sustainable growth and rising living standards in Canada,” Schembri said.

He also said that trade liberalization is one of the most important measures that stand to increase productivity, as Canadian companies’ access to overseas markets spurs them to boost productivity through innovation and investment.

Noting that “uncertainty about U.S. trade policy currently weighs on business investment and export growth,” Schembri said Canada’s recent trade agreements with the European Union and Pacific countries are creating opportunities for companies.

“Our history tells us that our firm commitment to trade liberalization will remain important for supporting solid potential growth in the future,” he said.

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