MNI: BOC To Use Rate Flexibility, Tradeoffs Amid Supply Shocks

Bank of Canada officials are more likely to consider interest-rate trade-offs and flexibility in an era where supply shocks often lead the economy into a combination of faster inflation and weaker output, Deputy Governor Sharon Kozicki said in a speech Monday.

"When we find ourselves facing supply-driven trade-offs, sometimes it will make sense to use our flexibility to manage them, and other times it will not. The right choice won’t always be evident," Kozicki said in the text of a speech she's giving at a Norges Bank conference. The Bank's framework aims at correcting deviations from its 2% inflation target over two years and in the past officials have pointed to their ability to show discretion around the timing.

The remarks are pertinent with the Bank having cut interest rates four times last year and now signaling a pause at 2.25%, at a time when core inflation remains above target and output suffering from U.S. tariffs. Kozicki's speech didn't touch on the current rate outlook and most investors see the Bank on hold into next year with elevated risks from trade talks. 

Canada's economy since the pandemic has often presented a combination of above-target inflation and economic slack driven by supply shocks, whereas in prior decades there was a more demand-driven cycle, Kozicki said. The more recent experience is difficult because cutting rates for example can boost the economy while feeding inflation.

There can still be situations where policymakers judge that upside inflation pressures will be temporary, or where shoring up output can be more beneficial, she said. The Bank is developing new economic models and using more scenario analysis to help with these decisions, she said, pledging to remain transparent about its reasoning, Kozicki added. 

"Flexible inflation targeting has served Canada well in good times and bad. Even over the past year, in the face of disruptions from global trade tensions and increased geopolitical risks, inflation has stayed near the 2% target," she said. "This has allowed the Bank to provide some support to the economy as it adapts to a changing trade environment."