A day after raising expectations it would hike interest rates soon, the Bank of Canada signaled it might keep interest rates below their normal long-run level even after the Canadian economy is back to full capacity.
Below are additional comments from an appearance by Bank of Canada Governor Mark Carney and Senior Deputy Governor Tiff Macklem:
ON FOOD AND GAS PRICES
"Agricultural products as a whole are up 40 percent on a year-on-year basis. It's less since our last rate decision, but they're up substantially. As we tried to explain in April, our expectation was that food, these food prices would come into the economy over about a six month period. That's been the historic experience, and that's exactly what's happening. So there's a bit more to come, given the recent rises in food. So food, unfortunately, is going to remain relatively expensive and get a little more expensive in the coming months."
"As those prices stabilize, we expect to see, and coupled with higher incomes for Canadians, consumption move back up. And I have to say that at this point we're seeing the signs consistent with that."
ON NORMALIZATION OF RATES
"I wouldn't say it's targeted to any one group. It's as much to Canadians in general -- anyone who takes an interest in what the bank does, it's to try to better explain how monetary policy functions. Let me say how it doesn't function, it doesn't function according to some mechanical rule that dictates where monetary policy should be."
ON PACE OF WITHDRAWING STIMULUS
"The important point is that as the recovery continues to progress, as some of the considerable material excess supply in the economy is used up, monetary policy can be expected to move away from exceptionally stimulative levels. And they are exceptionally stimulative levels -- the overnight rate is at 1 pct in an economy where our inflation target is 2 pct, so that can be expected."
ON US DEBT CEILING DEBATE
"Our expectation is that U.S. authorities will come to an arrangement that honors their obligations to debt holders."
"If there were actually a default on U.S. debt, it would have profound implications in our view for financial markets. I don't think anybody can tell you with certainty exactly what would happen, but it's certainly our view it's not something that should be tested and it's not our expectation that would happen."
ON THE U.S. RECOVERY
"It is a slow U.S. recovery. We have been saying that for a long time ... The fiscal stimulus which is there now, will not be there in a few years time and the U.S. will have to start to retrench and there's a limited extent in the United States to which business investments ... can lean against these broader forces. It will be a slower U.S. recovery, which has implications for Canadian businesses and Canadians in terms of how we orient our economy, how we develop new markets, the extent to which we have to build productivity."
"These are all issues that have been there since the start of the crisis. The positive message we would deliver is that we are starting to see quarter after quarter an investment response that is more commensurate with the scale of the challenge."
ON MOVE AWAY FROM EXCEPTIONALLY STIMULATIVE LEVELS
"The important point is that as the recovery continues to progress, as some of the considerable material excess supply in the economy is used up, monetary policy can be expected to move away from exceptionally stimulative levels and they are at exceptionally simulative levels."
ON THE OUTPUT GAP
"You cannot mechanically assume that because the output gap on our projection -- the output gap is closed in the middle of 2012 -- that the bank's target interest rate will be back at neutral, however you define neutral. And in fact, I said further and I'll reiterate it today that if it were then the output gap wouldn't close over that horizon and inflation would not be back at target and why is that? Well there are considerable headwinds in the Canadian economy."
ON EUROPEAN DEBT WOES
"We are in daily contact with our colleagues in Europe."
"We're doing what we can both bilaterally and through the IMF and other channels to assist so it certainly is a priority for the global economy that this situation is contained and ultimately solved."
ON CURRENT INTEREST RATE LEVEL
"Rates are exceptionally stimulative now. They have been there for a good reason in the environment of these headwinds, headwinds that are expected to persist. So we are going to calibrate monetary policy very carefully in order to achieve our inflation target in a timely manner, but in an appropriate manner, in a sustainable manner."
ON EXTERNAL HEADWINDS
"We are in an environment here in Canada where there are substantial external headwinds. It starts with the level of the dollar, includes a relatively weak, relative to historic experience, a weak U.S. recovery, that we expect to persist, to remain modest, certainly over the projected horizon. It includes the challenges in Europe, and we've marked down our forecast for European growth as well. So we have a variety of factors which provide headwinds externally to the pace of the Canadian recovery. In that environment, the bank has to make a judgment in terms of the appropriate path for our monetary policy rate."
ON FOREIGN INVESTMENT BOOSTING THE CANADIAN DOLLAR
"There are a number of factors which influence the level of the currency. What the bank is focused on is achieving our mandate, which is the 2 percent inflation target measured by total CPI inflation, and we will continue to conduct policy consistent with that." (Reporting by Trish Nixon, Claire Sibonney, Solarina Ho and Ka Yan Ng; editing by Jeffrey Hodgson)
