Bank of Canada aims to stabilize prices, not cause deflation

The Bank of Canada, in a recent speech, emphasized its commitment to maintaining low and stable inflation rather than targeting deflation. Deputy Governor Rhys Mendes communicated that inflation has returned to the bank's target of 2%, easing concerns about heightened price pressures in the economy. He acknowledged the challenges posed by external factors, notably mentioning the potential impact of U.S. tariffs on Canadian goods. The central bank is currently navigating a delicate balance following a series of interest rate cuts to address previous inflation spikes while also remaining vigilant against a potential recession. Mendes highlighted the risks associated with trying to reduce prices, particularly after a prolonged period of inflation. Maintaining higher interest rates could stifle economic growth, leading to increased unemployment and lower wages, while lowering rates too quickly could reactivate inflation, especially within the housing market. Mendes cautioned about the long-term implications of deflation, which could distort consumer expectations and complicate future monetary policy. He concluded that the bank would continue to monitor economic data to inform its future rate decisions, with markets anticipating a moderate quarter-point rate cut in December, adjusting their forecasts based on recent inflation developments.