Wilkins Gives Most Detailed Explanation Yet for BoC's Caution

(Bloomberg) -- The Bank of Canada gave its most detailed explanation to date about why policy makers have become more cautious about the interest rate outlook, saying one reason is the desire to avoid a policy reversal.

Speaking Wednesday in New York, Senior Deputy Governor Carolyn Wilkins said the central bank puts a greater weight on the downside risks when inflation is already low, as it has been in Canada for an extended period. She also said it’s unclear just how much the increased sensitivity of indebted consumers to higher interest rates will affect spending.

“During periods of uncertainty like today, a cautious approach may be prudent,” Wilkins said, adding “caution has its limits, because there are complex trade-offs involved, including those related to financial stability.”


  • “One of the motivations for caution is that inflation has been in the lower end of the inflation target bands of 1 to 3 percent for quite some time,” she said, referring to last month’s decision to hold a 1 percent policy rate. Economic literature also suggests that a central bank “puts a greater weight on the downside risks when inflation is low to begin with”
  • There’s uncertainty about the interaction between interest rate increases with recent tightening measures in the residential mortgage market, she said
  • “ While higher household debt has likely heightened the sensitivity of spending to interest rate increases, it is difficult at this juncture to know by how much,” she said
  • “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”
  • The Bank of Canada is focused on tracking wages and potential output, the effect of two rate increases earlier this year and on trade talks, Wilkins said

Big Picture

Wilkins and her colleagues including Governor Stephen Poloz have said they will be cautious in further tightening after rate increases in July and September, the first in about a decade. Growth is set to slow after a burst in the first half of this year as an oil shock eased, while a stronger Canadian dollar and some one-time pressures are holding inflation below the Ottawa- based bank’s 2 percent target for longer than expected.

Other Details

  • The bank has factored in uncertainty around business investment and exports related to Nafta negotiations, and is monitoring developments on that file closely , Wilkins said
  • “There are also times when uncertainty can lead to caution or patience,” she said. “Just three weeks ago, the Bank decided to leave the policy rate unchanged. We said at the time that while less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate”
  • “Economic news in several advanced economies has recently been surprising people on the upside”
  • There have also been cases like in 2008 where the financial crisis led to a more aggressive change in monetary policy, in part because of the risk of hitting the limits of stimulus through lower interest rates

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