Lesson From Canada: There Really Are No Rate Hike Targets

Despite an inflation spike in Canada, Bank of Canada Governor Stephen Poloz says "Rate hikes Aren't Mechanical."

Bank of Canada Governor Stephen Poloz said he’s not worried about inflation temporarily rising above the 2 percent target this year, and the acceleration by itself isn’t sufficient to warrant an interest rate increase.

Speaking Saturday to reporters in Washington, Poloz said a tolerance for temporary movements is exactly why the central bank uses a 1 percent to 3 percent range for inflation and doesn’t mechanically raise interest rates when price growth surpasses the 2 percent point.

“What I don’t want is for people to be spending this entire year asking me what I’m up to because inflation is above target,” Poloz said. “You need once in a while to remind people that there’s a range and that’s okay, the policy allows for this. We’re not violating our target in some way.”

Poloz said he even sees some incidental benefits from the brief acceleration. Since inflation has under-performed in recent years, a period above target could actually help reinforce expectations for inflation at 2 percent, he said.

“In that abstract way, it’s actually a positive thing because we’ve had an extensive period where it’s been below, so that period of slightly above is going to help reinforce that 2 percent average which we haven’t quite made in the last few years,” Poloz said. “There is no intention there. I’m just saying that’s a positive byproduct of that modest overshoot that’s happening.”

Lesson of the Day

If central banks in Canada, the US, Europe, anywhere really, want to hike, they will. If they don't, they will find an excuse not to.

In the case of Canada, Poloz claims there is a benefit to higher inflation because it was too low, too long.

In the US, the Fed clearly wants to hike, so it stresses growth. Whether the Fed members actually believe what that say may be another matter.

Today, Canada defines price stability as one to three percent. Tomorrow? Who knows.

Mike "Mish" Shedlock

Comments (8)
No. 1-8
SweetKenny
SweetKenny

Poloz is worried about over indebted Canadians. Let’s see where this goes...

Realist
Realist

Kenny is correct. Though I'm sure there are other reasons as well. Raising rates in Canada would likely cause the Canadian dollar to strengthen, which would probably hurt Canadian competitiveness, at an important point in time. It appears as if a new NAFTA agreement will be agreed to shortly.

AWC
AWC

All the Central Banks own this now, Mish. They will "Do Whatever it Takes" to keep the plates spinning in the air. And we don't really think Poloz wants to crash the Canadian House bubble, do we? This just ain't our grandfathers business cycle here.

MissionAccomplished
MissionAccomplished

I tell ya. We have not yet begun to unleash the awesome power hidden in the phrase "by fiat".

What reality would you like? What past does not suit you present? We're all Emperors in New Clothes now.

RonJ
RonJ

"Rate hikes Aren't Mechanical." They just might look mechanical for some stretch of time, such as when Greenspan raised 1/4% each FED meeting, after dropping the rate to 1% and holding it there for an extended time. Bernanke then topped off the rate hikes with a 1/2% hike to "prove" his inflation fighting credentials. A while later he was uttering his famous words, it's confined to subprime.