Bank of Canada Governor Mark Carney said central banks have room to ease monetary policy further if needed and can be flexible in meeting inflation targets.
In comments which may provide insight into his thinking as he prepares to take over the Bank of England in July, Carney said policy in developed countries isn’t “maxed out” and that central bankers often have room to manoeuvre when meeting inflation goals.
“There continue to be monetary policy options in all the major economies,” Carney told the World Economic Forum’s annual meeting in Davos, Switzerland, identifying communication and unconventional stimulus as possible tools. The current task of monetary policy is to ensure the key economies “achieve escape velocity,” he said.
While he didn’t identify the UK, he said that central bankers “might take a little longer” to hit their inflation goals in economies facing budget cuts and above-target inflation. That echoes the policy of the Bank of England, which has left its key interest rate at 0.5 per cent for three years and pursued asset purchases even though inflation has topped its 2 per cent target over the period.
Drawing a closer parallel with Canada, Carney said a central bank could “lean into the wind” if inflation is below target and there is a potential issue with household credit. That involves keeping monetary policy tighter than otherwise would be the case.
‘Escape velocity’
Canada’s inflation rate was at a three-year low of 0.8 per cent in December and Carney has identified consumer debt as a concern.
“Within the framework of flexible inflation targeting that exists in most of the developed economies, there remains considerable flexibility,” Carney said.
Central banks also need to help economies achieve the “escape velocity,” Carney said. That’s why the US Federal Reserve laid out inflation and unemployment goals for keeping policy loose, Carney said.
Central banks alone cannot beat economic strains and governments in Europe and the US need to take steps too, he said.
“There is not an ability of central banks to take all these risks out or set the seeds for a sustainable recovery,” he said.
