Bank of Canada: Oil slump could briefly dip inflation into the negative

However, deputy governor says even prolonged negative inflation wouldn’t constitute deflation.

0 February 19, 2015
by Canadian Press

15-Feb-downward-chart-360OTTAWA — 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 said even if the rate dips below zero it would not be considered deflation, which would require a decline in consumer prices across the board.

“Rest assured — even if inflation turns negative for some time that would not constitute deflation,” Cote said in prepared remarks of a speech she was to deliver 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.”

Cote said the sharp slide in crude prices is expected to continue pushing down on inflation in the coming months before it bottoms out slightly above zero — or perhaps a little lower.

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.

The latest Statistics Canada estimate found the annual inflation rate was 1.5 per cent in December.

Last month, the central bank predicted the inflation rate to temporarily move down to one per cent in 2015 before climbing back up to two per cent in the second half of the year.

The Bank of Canada surprised markets in January by cutting its key interest rate to 0.75 per cent from one per cent. Many analysts are expecting it to lower it again at its next scheduled rate announcement on March 4.

“That (interest rate) decision will be based on a careful examination of how the economy, and the risks, are evolving,” Cote said.

The central bank can adjust its interest rate to help inflation stick close to an ideal two per cent target.

Bank of Canada governor Stephen Poloz has said falling oil prices will have an “unambiguously negative” impact on the Canadian economy.

Cote said the negative effects of low oil prices happened quickly. She also listed offsets such as a stronger United States economy and the weakened Canadian dollar, which is expected to help exporters.

© 2015 The Canadian Press

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