NEW YORK (Reuters) - A cautious approach to monetary policy may be prudent during times of uncertainty like today, but caution has its limits because the trade-off can be financial instability, Bank of Canada Senior Deputy Governor Carolyn Wilkins said on Wednesday.
Explaining how central banks make decisions amid uncertainty, Wilkins said policy may respond to negative shocks more aggressively than usual when interest rates are low, while a cautious approach is prudent when it is not clear how rate moves will affect spending.
“Another reason for caution - in this case more of a ‘wait and see’ approach - is related to a desire to avoid having to reverse policy direction abruptly in the future,” Wilkins said in prepared notes for a speech in New York.
Wilkins said the bank is particularly focused on data that indicate how wages and potential output are progressing, as well as the effects of its July and September rate hikes and the renegotiations of the North American Free Trade Agreement.
“Caution has its limits, because there are complex trade-offs involved, including those related to financial stability,” Wilkins said.
Reporting by Stephanie Kelly, writing by Andrea Hopkins