By Rod Nickel
WINNIPEG, Manitoba, Feb 15 (Reuters) - Canadian monetary policy might have to be more aggressive to boost confidence and increase demand at a time when fundamental forces are weighing on economic growth, Bank of Canada Deputy Governor Lawrence Schembri said on Thursday.
In a speech that did not directly address the economic outlook or future rate hikes, Schembri said ongoing temporary shocks make it impossible for the central bank to hit its 2 percent inflation target consistently.
While the central bank's inflation targeting regime works well and inflationary expectations remain firmly anchored, several trends happening in advanced economies could pose a challenge to the framework, Schembri said.
The underlying growth in the economy is expected to remain low or slow further, due in part to lower labor force growth and declining labor productivity growth, he said.
"Therefore, the cyclical forces that normally help to propel an economy out of an unexpected downturn, namely business and residential investment as well as purchases of large durable goods, may be less powerful, especially if debt levels are high and confidence is slow to rebound," Schembri said.
"In such circumstances, policy might have to be more aggressive to boost confidence and increase demand," Schembri said in prepared notes for a speech to the Manitoba Association for Business Economists.
He also noted that higher levels of household and public debt in advanced economies could pose a challenge to the central bank's framework, while a gradual decline in interest rates reduced the scope of central banks to adjust their policy rate.
Acknowledging the use of explicit forward guidance and large-scale asset purchases by some central banks, Schembri said further research is needed to gauge the effectiveness of those tools and how to use them.
While more explicit coordination of fiscal and monetary policy would raise governance issues, the bank could focus research on mechanisms to coordinate policies, because complementary frameworks could deliver better outcomes, he said.
Schembri said the renewal of the central bank's inflation target was not automatic, but that Canada's experience with inflation targeting had been much more successful than originally expected.
"In hindsight, we underestimated how powerful anchored inflation expectations would be in helping to keep inflation close to target. Our policy framework continues to work, and work well - inflation and inflationary expectations remain firmly anchored," he concluded.