February 19, 2015 / 5:18 PM / 3 years ago

Bank of Canada says rate call to hinge on study of economy, risk

MONT-TREMBLANT, Quebec (Reuters) - The Bank of Canada will base its March 4 interest rate decision on a careful examination of how the economy and the risks to it are evolving, deputy governor Agathe Cote said on Thursday.

The central bank last month shocked markets by cutting interest rates, citing a threat to growth and its 2 percent inflation target. Many market analysts expect another cut on March 4 by the bank, which has stopped giving guidance on rate decisions.

“On March 4 we will come to our next interest rate decision. That decision will be based on a careful examination of how the economy, and the risks, are evolving,” Cote said in the prepared text of a speech.

Cote said the central bank had cut rates last month in a bid to provide insurance against downside risks to inflation and financial stability risks.

She also said that although the overall inflation rate could briefly dip into negative territory on the back of lower oil prices, there was no reason to fear deflation in Canada because inflation expectations were anchored.

She said that in most economies, there was a limited risk that inflation expectations would become unanchored.

Lower gasoline costs pulled down the Canadian annual inflation rate in December to a nine-month low of 1.5 percent.

But the measure of core inflation - which strips out the prices of some volatile items and is closely watched by the Bank of Canada - increased to 2.2 percent from 2.1 percent.

Cote said that while the negative effect of the oil price slump happened quickly, potentially compensatory factors like the stronger U.S. economy and the weaker Canadian dollar were less easy to predict.

She also said that increased competition in the retail sector, as well as the large output gap, helped explain why underlying inflation in Canada was still below 2 percent.

Writing by David Ljunggren; Editing by Chizu Nomiyama

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