Reading Bank of Canada Monetary Policy Reports doesn't normally annoy me, but reading this latest one did. Specifically, this bit:
"Although the Bank considers the risks around its projected inflation path to be balanced, the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance. However, the Bank must also take into consideration the risk of exacerbating already-elevated household imbalances." (my bold)
Translation: "We would maybe like to cut interest rates to prevent inflation staying below target, but we are scared of doing this because it might cause some people to borrow too much, so we are just crossing our fingers and hoping something will turn up so we don't need to cut interest rates."
First off, there's a massive implicit fallacy of composition in that sort of reasoning. If you cut interest rates for one individual that individual will respond by borrowing more and spending more. But that is not how monetary policy works for an economy as a whole. Because one person's spending is another person's income. So if people spend $100 more per month then people earn $100 more income per month, so they don't need to borrow anything more in order to spend more. And it's even less true in an open economy, if a cut in interest rates causes exchange rate depreciation so foreigners spend more on Canadian goods, so Canadian net borrowing from abroad actually falls, as net exports increase.
Second off, low equilibrium interest rates are a symptom of weak demand for goods and low expected inflation. When people and firms fear continuing recession, desired investment will be low ("who will buy the extra goods we produce?"), and desired saving will be high ("what if I can't get a job?"), for any given real interest rate. So the equilibrium real interest rate will actually be lower when people and firms fear a continuing recession than when they don't. (The IS curve slopes the "wrong" way, in other words. Or the IS curve shifts left if people fear continuing recession because of overly tight monetary policy, if you prefer to think of it that way instead.)
If the Bank of Canada really does fear the consequences of continued low interest rates for "household imbalances", the very last thing it should be doing is increasing the level of fear that it will be unwilling to loosen monetary policy enough to prevent a continuing recession.
Monetary policy is not what the Bank of Canada is doing right now. Monetary policy is the set of beliefs people have about how the Bank of Canada will and would respond in future to various actual and hypothetical future circumstances. And by saying it is less likely to cut interest rates should the need arise, because of fear of "exacerbating already-elevated household imbalances" the Bank of Canada is changing people's beliefs, increasing people's fear of continuing recession, and prolonging the duration of low equilibrium interest rates.
The best way to raise interest rates is to say you will cut interest rates if the economy doesn't recover quicker. The best way to lower interest rates is to say you are scared to cut interest rates. The Bank of Canada's stated fear of cutting interest rates makes it more likely its fears will be realised.