MNI: BOC Says Balancing Risks of Over- And Under-Tightening

Bank of Canada Deputy Governor Toni Gravelle kept a consistent message Thursday about progress slowing inflation and the potential for another interest-rate hike following Wednesday's decision to keep borrowing costs at the highest since 2001, while noting record immigration has boosted the economy's potential output.

"Our decision to maintain the policy interest rate at 5% reflects our best efforts to balance the risks of over- and under-tightening. We don’t want to slow the economy too much, but we also don’t want Canadians to continue living with the pain of high inflation," according to text of a speech he's giving in Windsor, Ontario. The remarks also reiterated "we remain prepared to increase the policy rate further if needed" and "the economy no longer looks to be in excess demand." Core inflation has slowed to about 3% on an annualized three-month basis in the latest figures for October but "we need to see further progress," Gravelle said.

The Bank kept rates unchanged for a third meeting Wednesday and the statement lacked any clear shift to a peak in borrowing costs. Investors see rate cuts coming perhaps in the second quarter of next year and the Bank's view the economy hasn't clearly opened up slack is more upbeat than some forecasters. Still, the economy has defied investor bets on an economic slump for much of this year.

Judging the tightness of Canada’s economy is complicated by the biggest influx of immigrants in decades boosting labor supply and creating more demand. While unemployment has climbed from record lows much of that is tied to population growth. Much of Gravelle's speech looked at the influence of record immigration in the last few years on the economy.

New arrivals have boosted the economy's potential output by 2%-3% without adding to inflation, he said.

"We estimate the boost to consumer spending from the recent increase in newcomers had barely any effect on inflation -- less than 0.1 percentage points," Gravelle said. It's more likely immigration has added to a rise in rental costs though the bigger force is a longstanding lack of supply, he said. Rental inflation quickened to a four-decade high of 8.2% in October from a year earlier, he noted.