Bank of Canada: will continue to raise interest rates gradually

By David Ljunggren

OTTAWA (Reuters) – The Bank of Canada will continue to raise interest rates gradually, Governor Stephen Poloz said on Thursday, stressing that despite economic uncertainties the bank did not want to let inflation momentum build.

The central bank has raised rates four times since July 2017 and most market operators expect another hike on Oct 24. Poloz said that while the bank did not know exactly where the economy was heading, this did not justify inaction.

“It does not mean keeping interest rates on hold until inflation momentum starts to build,” he said in prepared remarks of a speech in Moncton, New Brunswick.

“The bank will continue to follow a gradual approach to raising interest rates, and remain dependent on incoming data and other sources of information to guide our decisions,” the governor added.

The bank left rates unchanged on Sept. 5 and the next day senior Deputy Governor Carolyn Wilkins said that while making the decision, policy makers had discussed whether the gradual approach to raising rates was still appropriate. They concluded it was, she added.

Although the annual inflation rate in August was 2.8 percent, well above the bank’s 2.0 percent target, Poloz said this was partly due to the boost provided by temporary factors such as higher gas prices.

Poloz, who cited the inflation rate and very low unemployment, said the economy was operating near capacity.

“We know that if we move too slowly to raise interest rates, the economy could move firmly above its capacity limits and inflation could establish significant momentum. We certainly want to avoid this outcome,” he said.

That said, new digital technologies could be giving the economy more room to grow before inflation pressure emerged.

“Raising interest rates too quickly could choke off this economic growth unnecessarily,” Poloz continued.

The topic of his speech was the disruption caused by new digital technologies such as artificial intelligence, which he said had added to the factors the bank was analyzing.

It is also studying how tougher guidelines for mortgage lending are affecting the housing market, the effect of stalled talks to renew NAFTA and how sensitive the economy is to higher interest rates, he said.

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