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Murray Says Canada Rate Can Be Off Neutral When Target Met

Bank of Canada Deputy Governor John Murray said it’s a misconception that policy makers must maintain interest rates at a “neutral” level when inflation is near the central bank’s target and the economy is close to full output.

Murray, one of six people who set the central bank’s key interest rate, including Governor Mark Carney, said the group must look ahead to pressures that may take inflation away from their 2 percent goal even when the economy is balanced.

“Headwinds and tailwinds are often present, threatening to push the economy and inflation higher or lower,” Murray, 63, said in a speech today in Vancouver. “Monetary policy must lean against these forces with opposing pressure from higher or lower interest rates in order to stabilize the economy and keep inflation on target.”

The bank’s April 17 policy decision said that a rate increase “may become appropriate” because of a faster-than-expected recovery. The benchmark overnight lending cost has been 1 percent since September 2010 in the longest pause since the 1950s.

“It still represents exceptional monetary policy accommodation,” Murray said while answering questions after the speech.

Today’s remarks echo earlier comments by Carney, who said in September he has “considerable flexibility” in how fast inflation returns to the bank’s target, and said that investors shouldn’t expect him to rely on “mechanical rules” in setting interest rates.

‘Exceptional Circumstances’

Murray also reiterated that monetary policy can be used to guard against financial-market excesses in “exceptional circumstances” where regulation and other tools fail.

Most of Murray’s speech dealt with the process by which the central bank comes to an interest-rate decision. He spoke to a mortgage broker group in Vancouver, where officials have said they are worried about a surge in the city’s condominium market.

The growth of home equity loans in recent years has introduced risks to some families while providing benefits to others by allowing them to smooth out their consumption spending over time, Murray said after the speech.

The products, also known as HELOCS, are “good, but for some potentially a little risky,” Murray said. “Certain households could find themselves a little exposed.”

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