Julie Gordon, David Ljunggren

OTTAWA, (Reuters) – The Bank of Canada is likely to need to lower rates below their effective lower bound (ELB), more frequently in the future. It will also have to resort to alternative stimuli to reduce shocks, said Governor Tiff Macklem on Wednesday.

Macklem spoke to business audiences via a video conference, stating that the current low interest rates meant the bank had to use tools such as forward guidance and quantitative ease more frequently going forward.

A lower neutral rate will likely mean that we’ll need these tools more frequently in the future. These alternative tools work, but we don’t have as much experience using them,” he added.

As the coronavirus pandemic swept the country, the Bank of Canada reduced its benchmark rate to 0.2% in March 2020. It was both a record and an ELB. The Bank of Canada also announced its first ever quantitative easing program, stating that rates would remain low for a long time.

Macklem indicated that forward guidance (essentially, committing to lower rates for longer) could be useful under certain conditions to help support employment and to return inflation to target. But it comes with its limitations.

He stated that “exceptional forward guidance” implies that inflation may rise slightly above the target following exit from ELB. However, it will return to target over the medium-term.

Canada’s inflation rate rose to an 18-year peak of 4.7% in November according to data on Wednesday. It was also higher than the 1-3% limit by central banks.

The Bank of Canada stated that it expected the inflation rate to fall towards 2% by 2022 and could increase rates as early as April. The first rate hike is expected to occur in March or April, according to the money markets. [BOCWATCH]

Canadian dollars remained steady at around 1.2915 (or 77.43 U.S.cents) to the greenback following the speech. This was 0.4% lower than the previous day.