Carney Says Bank Wording Change Didn’t Signal Shift

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The Bank of Canada was not signaling a shift in the balance of risks to its inflation forecast posed by the economic outlook when it dropped a reference to those risks in its March 2 interest rate announcement, Bank of Canada Governor Mark Carney said.

The dropped wording -- about the risks to the inflation projection being “tilted slightly to the downside” -- was meant to recognize the uncertainty around how the bank would operate with its policy rate as low as it can go, Carney said.

“The reason we were saying that was because we were operating at the zero lower bound,” Carney said today in response to an audience question following a speech in Ottawa. He said the bank was confident that it could respond properly to higher-than-expected inflation with its conventional policy, adding the bank was less confident of the effectiveness of unconventional policies, such as quantitative easing, if inflation was weaker than expected.

“If there were a shock to the downside, we would probably undershoot in terms of our response on the unconventional side,” Carney said.

The phrase was meant to signal a risk in the bank’s response to lower inflation, rather than the probability of low inflation occurring, said Carlos Leitao, chief economist at Laurentian Bank Securities Inc.