Subdued growth may change monetary policy approach: Bank of Canada

FILE PHOTO: Joggers run past the Bank of Canada building in Ottawa July 17, 2012. REUTERS/Chris Wattie/File Photo

WINNIPEG, (Reuters) - Monetary policy might have to be more aggressive to boost confidence and increase demand at a time when fundamental forces are weighing on economic growth, Bank of Canada Deputy Governor Lawrence Schembri said on Thursday.

In a speech that did not directly address the economic outlook or future rate hikes, Schembri said ongoing temporary shocks make it impossible for the central bank to hit its 2 percent inflation target consistently.

While the central bank’s inflation targeting regime works well and inflationary expectations remain firmly anchored, several trends happening in advanced economies could pose a challenge to the framework, Schembri said.

The underlying growth in the economy is expected to remain low or slow further, due in part to lower labor force growth and declining labor productivity growth, he said.

“Therefore, the cyclical forces that normally help to propel an economy out of an unexpected downturn, namely business and residential investment as well as purchases of large durable goods, may be less powerful, especially if debt levels are high and confidence is slow to rebound,” Schembri said.

“In such circumstances, policy might have to be more aggressive to boost confidence and increase demand,” Schembri said in prepared notes for a speech to the Manitoba Association for Business Economists.

(Reporting by Rod Nickel, writing by Andrea Hopkins and Leah Schnurr); +1 613 235 6745