The Bank of Canada (BoC) is caught between a rock (rising inflationary pressures) and a hard place (waning economic momentum).
On the one hand, the Bank may believe that it needs to raise its policy rate pre-emptively to stay in front of rising inflationary pressures, but on the other hand, if our economic momentum has already begun to slow naturally, incremental rate hikes risk doing more harm than good.
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Last week BoC Deputy Governor Carolyn Wilkins gave a speech about how the Bank’s monetary policy framework is evolving. In the Q & A session afterward she commented that the BoC may end up being a victim of its own success because if its policy-rate rises keep inflationary pressures contained, observers might say that the Bank’s monetary-policy tightening was unnecessary.
What she didn’t say is that in such a circumstance, because some of our economic momentum will need to be sacrificed at the altar of price stability, criticism may still be warranted. After all, over-tightening monetary policy also controls inflation, but at too high a cost.
I see that as the BoC’s biggest risk in the current environment.