MNI POLICY: BOC May Need Longer Rate Outlook on Finance Risk>

By Greg Quinn and Anahita Alinejad

     OTTAWA (MNI) - The Bank of Canada may need more than two years to 

bring inflation back to target when there are longer-term troubles in 

financial markets, Deputy Governor Paul Beaudry said. 

     The BOC's usual two-year timeframe for looking at whether inflation 

will return to its 2% goal could miss longer-run dangers such as a 

buildup of household debt, Beaudry said in the text of a speech he's 

giving at Laval University in Quebec City. A buildup of debts could 

trigger much more damage to the economy over time, he said, meaning 

having flexibility could help the BOC do a better job within its current 

mandate. 

     "This should be seen not as contrary to our objective or a change 

in our focus on the inflation target but as another side of the same 

coin," Beaudry said Thursday. 

     The language is a shift from past BOC comments that the existing 

framework gives them enough scope to lean against strained financial 

markets and inflation must remain the prime objective. The BOC is in the 

middle of a framework review due in 2021 and Beaudry said recent 

research suggests more benefits to leaning against markets than when the 

idea was rejected during the last review. 

     "If we bring financial vulnerabilities into the equation, it means 

introducing a degree of flexibility into the inflation-targeting 

process," said Beaudry, who didn't say there was any specific plan to 

make a formal change to how the BOC operates. "The horizon over which we 

would work to get inflation back to target then depends on the severity 

of financial vulnerabilities. It's not yet entirely clear how important 

these channels are, but there is sufficient evidence to warrant our 

attention." 

     The speech didn't provide a near-term outlook on Governor Stephen 

Poloz's statement last week that the door was open to a rate cut. 

Beaudry reiterated policy makers thought about making an "insurance" cut 

in October before deciding the risks of re-igniting pressures on 

indebted consumers were too great. 

     The BOC has held its key rate at 1.75% to become the highest policy 

benchmark in the G7 over the last year. Central banks around the world 

now face the risk that a surge in low-quality debt from an era of 

low-for-long rates could lead to another credit squeeze in the future.

     That's something Beaudry said BOC policy makers are keenly aware 

of. 

     "If interest rate decisions can partially spark the debt buildup 

over many years, this would present a new challenge for a central bank 

like the Bank of Canada, since the time frame usually used to discuss 

the effects of monetary policy is only two years," he said. "Taking 

these effects into account could thus require the Bank to extend the 

period of analysis of monetary policy."

--MNI Ottawa Bureau, +1-613-314-9647, greg.quinn@marketnews.com

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