The Bank of Canada is embracing a cautious approach to future interest-rate increases after two quick hikes this summer.
Governor Stephen Poloz insisted Wednesday that the central bank isn't setting a firm course for its next moves, citing an unusual number of "unknowns" hanging over the outlook for inflation.
"There is no predetermined path for interest rates from here," Mr. Poloz said in speech in St. John's. "Monetary policy will be particularly data dependent in these circumstances and, as always, we could be surprised in either direction."
Mr. Poloz added that he and his central bank colleagues will "continue to feel our way cautiously."
Speaking to reporters after the speech, he said the bank is in "uncharted territory" as it ponders future rate moves.
The go-slow message dampened expectations in financial markets that the bank was poised to raise its benchmark interest rate – now at 1 per cent – as early as next month.
The prospect of a slower pace of rate hikes sent the Canadian dollar tumbling more than half a cent to 80.2 cents (U.S.) in trading Wednesday.
The central bank has raised its key overnight rate twice this year – in July, and again earlier this month. Canada's major banks quickly matched those increases by raising rates on mortgages and lines of credit.
But the sense of urgency about getting rates back up to more normal levels appears to be easing a bit.
The speech "confirms our assumption that tightening from the Bank of Canada will be a gradual affair from here," Canadian Imperial Bank of Commerce economist Nick Exarhos said in a research note.
"The Bank is in no rush to tighten rates further," said Mr. Exarhos, adding that CIBC doesn't expect another rate hike until some time next year.
Bank of Montreal economist Benjamin Reitzes said the bank is still in tightening mode, "but the data will determine how quickly they move."
The speech marked Mr. Poloz's first public comments in more than two months – a protracted silence that has prompted criticism about the bank's communications style.
Speaking to reporters, Mr. Poloz said the bank is always looking at new ways to communicate, but he rejected criticism that the bank had somehow misled markets prior to its Sept. 6 rate hike.
"An awful lot of people were not surprised by that interest-rate decision," Mr. Poloz said. "How does that happen?"
The bank is also keeping a wary eye on the level of the Canadian dollar, which affects prices of goods in Canada and the returns companies receive on their exports.
"Currencies can move for many other reasons, including external factors, and these movements can affect our inflation outlook, depending on their cause, size and persistence," Mr. Poloz said.
Mr. Poloz also pointed out that the economy appears to be slowing after a blistering start to the year. "Recent data point clearly to a moderation in the second half of the year," he said.
The economy expanded at a 4.5-per-cent annual pace in the second quarter and 3.7 per cent in the first quarter.
Mr. Poloz said bank officials are particularly preoccupied with a number of factors keeping inflation low even as the Canadian economy nears full capacity.
Going forward, the inflation outlook is clouded by "important unknowns," including slow wage growth, the pace that businesses are adding capacity, the impact of technology and e-commerce, plus high levels of household debt, according to Mr. Poloz.
"These unknowns are unusual, as they are mostly the product of the unusual nature of the situation we find ourselves in – the legacy of the global financial crisis, the protracted period of slow economic growth and extremely low interest rates, and so on," Mr. Poloz explained.
Canada's inflation rate has remained stubbornly below the bank's target of 2 per cent. Inflation was running at an annual rate of 1.4 per cent in August, up from 1.2 per cent in July.
He stressed the need for the bank to keep updating its "understanding of the economy in real time," and that may mean less reliance on economic models.
There is "reason to think" that higher interest rates will have more of an impact on the economy and inflation this time around because so many Canadians have taken on a lot of debt to buy homes and fuel their spending, he said.
Mr. Poloz patted himself on the back for the two rate cuts in 2015, which he said helped the economy weather the oil price shock. The economy would be about 2 per cent smaller today without that rate relief, and there would be 120,000 fewer jobs, he said.
"All things being equal, this would have meant even more household debt and increased longer-term vulnerability for the economy," he said.