oil-price-limbo

The turbulence of the global oil slump could briefly nudge Canadian inflation into negative territory, but the Bank of Canada sees no reason to worry about outright deflation, one of its senior officials said Thursday.

Deputy governor Agathe Cote tried to get ahead of any concerns that could surface if the annual rate dips below zero this spring, saying true deflation would only follow a sustained period of widespread price declines.

Read: Fed unsure about right time, conditions for rate increase

“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.”

Cote cautioned a sub-zero scenario could happen in the second quarter of 2015, as cheap oil continues to push down on inflation.

Last month, the central bank predicted the annual inflation rate would hit 0.3% for the same quarter before climbing back up to 1.9% at the start of 2016.

The latest Statistics Canada estimate for inflation found cheaper oil had already helped bump the annual rate down to 1.5% in December.

Cote’s remarks also came as the Bank of Canada prepares for its next scheduled interest-rate announcement on March 4.

Read: How to cope with inflation, deflation and stagflation

The central bank surprised markets in January by cutting its key interest rate to 0.75% from 1%. 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.

The bank tries to keep inflation close to an ideal 2% target and it can adjust its trendsetting interest rate to help the economy hit that bull’s-eye.

Many analysts are expecting Poloz to shave another quarter point off the rate.

“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,” 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.

Read: Falling prices will boost U.K. economy: Carney

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.

In her speech, Cote also announced the Bank of Canada had created a new quarterly survey to measure economic expectations of households, including their thoughts on inflation.

She said the poll will also help inform the central bank on how consumers’ view issues like job-market prospects and personal finances.

Originally published on Advisor.ca

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