UPDATE 2-Bank of Canada says unworried by retail's role in disinflation

Fri Feb 7, 2014 6:31pm EST
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By Janice Tibbetts

MONTREAL Feb 7 (Reuters) - The Bank of Canada signaled a willingness on Friday to ignore the role intense retail competition plays in disinflation, saying that for monetary policy purposes, this is "good disinflation" and likely transitory.

The message could calm any market speculation that the bank wants to cut rates to get inflation back up to its 2 percent target after it has held below that level for the past 20 months.

Tiff Macklem said in his final scheduled public speech as the central bank's senior deputy governor that the bank believes chronically weak inflation reflects both a more competitive Canadian retail scene and slack in the economy, with only the latter considered "bad" and worthy of a central bank rate cut.

"And as we observe disinflation across a number of advanced economies, the message from theory is that monetary policy should work to counter 'bad' disinflation stemming from weak demand, but look through 'good' disinflation from increased competition and improved productivity," he said.

CIBC World Markets said in a note that the speech throws "a few droplets of cold water on hopes for a rate cut."

The bank is just as concerned about below-target inflation as it about high inflation because normally it indicates weakness in the economy.

But Macklem said it was good news that consumer prices had been driven down by the expansion of Walmart discount stores in Canada and the recent arrival of Target and other American retailers.   Continued...