REPEAT: MNI: Poloz: Gradual Doesn't Mean No Hike Until Infl

Repeats Story Initially Transmitted at 16:10 GMT Aug 25/12:10 EST Aug 25

By Yali N'Diaye

     OTTAWA (MNI) - Bank of Canada Governor Stephen Poloz said Saturday that a

gradual data-dependent approach to policy normalization doesn't mean "keeping

interest rates unchanged until inflation pressures emerge."

     Doing so would indeed "guarantee falling behind the inflation curve," he

added in prepared remarks delivered at the Kansas City Federal Reserve Jackson

Hole Symposium. Being gradual, he said, means a more gradual approach to

tightening than traditional models would advocate, with the focus on balancing

the risks around future inflation.

     The BOC said in its July 11 statement that it continued its gradual

data-dependent approach even as it "expects that higher interest rates will be

warranted."

     Poloz made his remarks a week after Statistics Canada released inflation

data that far exceeded private analysts' forecasts and put Canada's CPI at the

top end of the BOC's operational range of 1% to 3%. Year-over-year inflation

reached 3.0% in July, the highest rate since September 2011, picking up from

2.5% in June. Core readings, however, continued to show inflation near or at the

2.0% target. 

     Poloz said Friday in an interview with CNBC that the BOC had expected a

pickup in inflation and that it should be temporary, echoing the July Monetary

Policy Report. 

     In his remarks Saturday, Poloz touched on inflation in the context of

digitalization, which he said is approached as one of the risks to the inflation

outlook.

     Inflation could accelerate as the economy is approaching full capacity,

while digitalization could be boosting aggregate supply and "holding inflation

pressures at bay."

     The spread of digital technologies, Poloz said, has led to an underestimate

of investment. As a result, "central banks are working with estimates of

potential output today that may be revised up in the future."

     The central banker overall sees digitalization as a net positive for

economic progress beyond the "initial negatives," although the latter require

that policies be put in place to help disrupted businesses and workers adjust.

     Still, he stressed that the "ability to measure the impact of digital

technology is continually playing catch-up with the technology." For instance,

upward revisions to past potential output could explain the underperformance of

inflation in advanced and emerging economies alike over the past five years.

     Overall, digitalization is also disrupting central banking, Poloz said,

which "is likely to be a major preoccupation of central bankers for the

foreseeable future."

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com