KINGSTON, Ontario, (Reuters) - There remains a degree of untapped potential in the Canadian economy, particularly in the labor market, that means the country may be able to generate more growth without higher inflation, the head of the Bank of Canada said on Tuesday.
While interest rates are likely to move higher over time, the central bank cannot take a mechanical approach to rates as policymakers cannot know in advance how far the capacity-building process can go, Bank of Canada Governor Stephen Poloz said.
Although the labor market has become "a good deal" healthier over the past year, there is still some slack remaining, Poloz said. Increased investment by existing and new companies and more turn-over in the labor market should create more supply in the economy through higher productivity and employment, he said.
As this process involves both upside and downside risks to inflation, the central bank will remain particularly data-dependent, Poloz said.
"If the economy builds more supply than usual, that will put downside risk on inflation; if less, that will create upside risk to inflation, and it is our job to balance those risks," Poloz said in prepared remarks of a speech.
The central bank has raised interest rates three times since last July and has said it will be cautious in considering future moves.