Bank of Canada examining ties between financial stability, monetary policy

Oct 12 (Reuters) - Assessing the costs and benefits of
possible monetary policy actions to address financial stability
concerns remains a priority ahead of the renewal of the Bank of
Canada's inflation target agreement next year, Governor Stephen
Poloz said on Monday.
As part of its research, the bank is gathering empirical
evidence about the effects of household debt levels on monetary
policy, Poloz said is his last scheduled public appearance
before an Oct. 21 interest rate decision.
The bank is also researching financial imbalances in the
household sector to find the best way to minimize the risk of
future crises and is developing models that will be better at
quantifying the impact of using monetary policy to combat the
build-up of imbalances.
"Central banks, including the Bank of Canada, have made
progress in developing new economic models and adapting existing
ones to integrate financial system variables and stresses as we
conduct monetary policy," Poloz said in the prepared text of a
speech at the annual meeting of the National Association for
Business Economics in Washington.
"We will continue to strive for a better understanding of
the interactions between monetary policy and financial
stability, and I expect to see a large amount of groundbreaking
research that will shed light on various aspects of this
relationship."
The Bank of Canada has cut interest rates twice this year to
stave off the economic blow from cheap oil prices, but some have
voiced concern that the cheaper borrowing costs will add more
fuel to an already hot housing market.
In a speech that largely echoed one he gave on Saturday,
Poloz justified the rate cuts as being required by the oil price
crash cutting into national income and threatening to drive
inflation below target for an unacceptably long time. The
central bank is widely expected to stand pat next week.
The bank aims to keep inflation at the midpoint of a 1
percent to 3 percent target range and its target agreement with
the federal government is up for a five-year renewal in 2016.
Poloz said earlier this year that while the bar for change is
high, it is important to look at research on whether or not the
target should be altered.