OTTAWA – The turbulence of the global oil slump could briefly nudge the Canadian inflation rate into negative territory this spring, a senior Bank of Canada official said Thursday.
But deputy governor Agathe Cote offered some reassurance, saying that even if the annual rate dips below zero it would not be considered deflation.
She noted that true deflation, which can be damaging for an economy, would require a period of widespread price declines.
“Rest assured — even if inflation turns negative for some time that would not constitute deflation,” Cote said in prepared remarks of a speech she delivered in Mont-Tremblant, Que., north of Montreal.
“When inflation expectations are solidly anchored, as is now the case in Canada, there is no reason to fear deflation.”
The central bank tries to keep inflation close to an ideal two per cent target and it can adjust its trendsetting interest rate to help the economy hit that bull’s-eye.
With lower crude prices expected to continue pushing down on inflation in the coming months, Cote cautioned the potential sub-zero scenario could happen in the second quarter of 2015.
In its monetary policy report last month, the central bank predicted the annual inflation rate to hit 0.3 per cent for the same quarter before climbing back up to 1.9 per cent at the start of 2016.
The latest Statistics Canada estimate found the annual inflation rate was 1.5 per cent in December.
Cote’s remarks Thursday came as the Bank of Canada prepares for its next scheduled interest-rate announcement on March 4.
The central bank surprised markets in January by cutting its key interest rate to 0.75 per cent from one per cent. Bank governor Stephen Poloz said the move was needed as insurance for the “unambiguously negative” impact that falling oil prices will have on the economy.
“That (interest-rate) decision will be based on a careful examination of how the economy, and the risks, are evolving,” Cote said.
Many analysts are expecting the bank to shave another quarter point off the trend-setting rate in a couple of weeks.
“While Cote cited the potential for negative inflation more as a risk than a certain eventuality, the talk about a dip below zero could further reinforce already entrenched expectations of a further cut on the March 4 decision date,” CIBC senior economist Peter Buchanan wrote in a note to clients.
The price of oil has fallen sharply since last summer when it traded for more than US$100 a barrel. The benchmark price has been around US$50 in recent weeks, but dipped below US$45 last month.
Cote listed positive offsets from the current conditions such as a stronger U.S. economy and the weakened Canadian dollar, which is expected to help exporters. But she noted many of the negative effects on growth by low oil prices have been swift.
There are fears in Europe of deflation, which can be destructive for an economy and can be a difficult cycle to escape.
As the costs of goods and services start to fall, deflation can encourage consumers to hold off making purchases with the expectation prices will tumble further.