Rate policy for today may pose future problems, Bank of Canada deputy says

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OTTAWA — A senior Bank of Canada official says the central bank is taking a deeper dive into how it makes interest rate decisions to better understand the trade-offs between a cut today and hitting inflation targets in the future.

Deputy governor Paul Beaudry says cutting interest rate to address an immediate concern typically sparks a boom in spending — and borrowing — activity.

While that may be good in the short term, he says in a speech today that the extra build-up in debt can actually slow the economy down the road and make it harder for the central bank to maintain its two-per-cent inflation target.

He says the Bank of Canada is digging deeper into the issue to better understand the interplay in interest rate decisions.

Among the challenges the central bank faces is looking beyond a two-year horizon to consider the effects interest rates changes coupled with “financial vulnerabilities” like household debt will have on inflation, he says.

The bank has avoided reducing its key interest rate in recent months, first in October in the face of global economic uncertainty and again earlier this month in the face of domestic concerns.