Source: The Canadian Press

The Bank of Canada is looking at the role of monetary policy beyond controlling inflation, senior deputy governor Tiff Macklem said Tuesday.

“If we look only at interest rates, inflation and output, we may miss bubbles and other elements of systemic risk as they build,” Macklem said in prepared remarks to the International Finance Club of Montreal.

“If we are to begin to consider the role of monetary policy in dampening financial imbalances, we need a deeper understanding of how one affects the other.”

The Bank of Canada cut its key interest rate to as low as 0.25% in response to the recent financial crisis, the lowest it could effectively go and the lowest in the central bank’s history.

The bank has since raised its policy rate three times this year, and currently stands at 1.0%, up from 0.25% prior to June 1.

Macklem noted that sound regulation and supervision are the first line of defence in a financial crisis, but even with oversight the question remains about the role monetary policy.

“If financial imbalances are specific to a sector or market and a well-targeted prudential tool is available, monetary policy would likely have little role to play. If, however, the imbalances in a specific market spill over to the entire economy or if the prudential tool is itself broad-based, it is more likely that monetary policy could have a role to play.”