Bank of Canada's Poloz eyeing global deflationary risk

Fri Apr 11, 2014 5:26pm EDT
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By Louise Egan

WASHINGTON (Reuters) - Policymakers are closely watching the risk of deflation in several advanced economies but they are encouraged by signs of a continuing improvements in the economic outlook, Bank of Canada Governor Stephen Poloz said on Friday.

While not talking specifically about Canada, where inflation has been below the central bank's 2 percent target for nearly two years, Poloz's comments shed some light on his thinking about a top concern domestically ahead of the bank's next interest rate decision on Wednesday.

"The risk of deflation is something that we all carry around when inflation is as low as it is," Poloz told reporters after a meeting of finance ministers and central bank governors from the Group of 20 leading economies.

"It's not that we fear deflation in the next moment. None of the real conditions that produce outright deflation, where all prices and wages are declining at the same time ... are present," he said.

"What we worry about is, when deflation is especially low, if there were another shock that came along that put more downward pressure on the economy, that would introduce the risk of a deflationary outcome."

Poloz suggested the worst-case scenario he described was becoming more distant.

"But the outlook continues to heal and to be giving us encouragement that we are on our way back home," he said, referring to the risk of deflation in Canada and elsewhere.

The central bank is unanimously expected to hold rates steady on Wednesday and investors will focus instead on how it describes the risks around weak inflation in its rate statement and its quarterly Monetary Policy Report to be released on the same day.   Continued...

Bank of Canada Governor Stephen Poloz speaks during a news conference upon the release of the Monetary Policy Report in Ottawa January 22, 2014. REUTERS/Chris Wattie