The Bank of Canada, as with other central bankers in the world is finding itself at the end of its monetary slack options. Given the weak pace of the Canadian economy the usual go-to policy would be to lower interest rates…but everyone has already been doing that for years now, and at 1% on the overnight rate and Canadian consumers that are already restrained by record levels of debt, further monetary slack is hard to find. Maintaining the now status quo of rock bottom rates and large asset purchase programs(QE et al) is no longer stimulative. See: Household imbalances keeping BoC from setting lower rates
“After 18 months of telling consumers and markets that its key interest rate would eventually be lifted from 1%, close to rock bottom, the Bank of Canada shifted gears into neutral…
If it were not for the concerns about household imbalances, the BoC would have cut its policy rate at last week’s [policy] meeting,” says Nomura Securities economist Charles St-Arnaud.”
Despite central bank efforts to force inflation, deflation is taking the upper hand in the global economy once more. In Canada inflation is stubbornly at the low end of the bank’s 1-to-3% target range and the economy is growing at a disappointingly slow pace in the absence of stronger corporate investment.
But lower prices are part of the healing process to restore consumer purchasing power in the absence of job and wage growth. The longer central banks try to keep prices unduly inflated, the longer the malaise of weak demand, low growth, superfluous capacity and supply . See this video of the Bank of Canada’s press conference yesterday.