UPDATE 2-Bank of Canada head says worried about downside inflation risk

Mon Nov 3, 2014 4:30pm EST
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(Adds comments on risks; reaction)

By Solarina Ho

TORONTO Nov 3 (Reuters) - The Bank of Canada is more concerned about the risk of weaker-than-expected inflation and soft growth than it would be about a jump in inflation and strong growth because such upside moves are easier to manage, Governor Stephen Poloz said on Monday.

His comments were perceived as dovish by market players and weighed on the Canadian dollar as they suggest the central bank is in no hurry to tighten policy.

"If we realized a downside risk, that would be a more significant event, since interest rates are already very low and we've done everything we think we are capable of doing," Poloz told reporters, while noting the bank has other tools available.

"The downside risk would be a much harder challenge for policymakers anywhere, not just here in Canada."

With inflation in Canada returning to around 2 percent from near the bottom of the Bank of Canada's target range of 1 to 3 percent, the bank has referred less to downside worries lately.

However, Poloz attributed some of the rise in inflation to temporary factors, and said labor conditions point to economic slack.

TD Securities senior Canada macro strategist Mazen Issa said even though Poloz has emphasized neutrality, "he's choosing to err on the side of caution as opposed to looking at what are the positives that have been happening in the economy".   Continued...