(Ottawa) The Bank of Canada is taking a closer look at how it makes its interest rate decisions to better understand the trade-offs between lower short-term rates and future inflation targets, said a deputy governor of the central bank on Thursday.
In a speech he gave at Laval University in Quebec, Paul Beaudry explained that the decision to lower interest rates to respond to an immediate concern generally leads to increased spending – and borrowing – from consumers.
While this may be good in the short term, he noted that the additional accumulation of debt could actually end up slowing the economy and making it difficult for the central bank to keep inflation at its target of 2, 0%.
Beaudry said the Bank of Canada is exploring the issue further to better understand the interactions associated with its interest rate decisions.
Among the challenges facing the central bank is that of looking beyond a two-year horizon to consider the effects of interest rate changes linked to “financial vulnerabilities” such as household debt inflation, he said.
The bank has avoided cutting its key rate in recent months, first in October in the face of global economic uncertainty and again in January, in response to domestic concerns.