Despite higher-than-forecast inflation, Bank of Canada Governor Mark Carney said he may keep interest rates low beyond when full output is restored as the domestic recovery is hobbled by a weak economy in the U.S., the nation’s biggest trade partner. “Given current material headwinds, the policy rate can return to its long-run level after inflation is projected to reach the 2 percent target and output is projected to reach its potential,” Carney said.
Is Mark Carney predicting that the Canadian economy is being pushed along a short-run Phillips curve or that the short-run Phillips curve is shifting? In which direction is the economy being pushed and how will Carney’s plan counter it?