OTTAWA (Reuters) - The Bank of Canada does not necessarily need to raise interest rates to “normal” levels even if the economy is running at full speed and inflation is close to the target level, Deputy Governor John Murray said in an article published on Thursday.
Murray addressed what he called five common misconceptions about Canadian monetary policy in the institution’s quarterly Bank of Canada review.
One such idea is the view that when inflation is nearing the central bank’s 2 percent inflation target and the economy is at full capacity, that benchmark rates should be “neutral,” a level much higher than the current 1.0 percent.
“Headwinds and tailwinds are often present, threatening to push economic activity and inflation higher or lower,” Murray wrote. “Monetary policy needs to lean against these forces with opposing pressure from higher or lower interest rates to stabilize the economy and keep inflation on target.”
The comment is a reminder to markets that there is no precise check list of factors the Bank of Canada needs to see before raising or cutting rates.
The bank last month signaled it was less upbeat about the economy and dropped any reference to future rate hikes for the first time in 18 months. It doesn’t see inflation reaching its target and the economy returning to full capacity until the end of 2015.
In his article, Murray said people who thought monetary policy targeted the exchange rate were also mistaken.
Some market players have suggested Bank of Canada Governor Stephen Poloz has a bias towards a weaker Canadian dollar because of his past as head of the country’s export agency, something Poloz has dismissed. Exporters are more competitive when the currency is weak against the U.S. dollar.
Murray said other misconceptions are that Canadian monetary policy is determined by what the U.S. Federal Reserve does, and that its focus on inflation ignores objectives like full employment and financial stability.
Reporting by Louise Egan; Editing by Chris Reese