And on August 17, the Federal Reserve Board cut the discount rate – the rate at which it lends directly to banks – 50 basis points, or 1/2 percentage point, and subsequently took several additional measures. These efforts to provide liquidity appear to have been helpful on the whole, but the functioning of a number of important markets remained impaired.
Subzero inflation, or deflation, would interact with existing indebtedness in a particularly undesirable way. Specifically, negative inflation would increase the real value of outstanding debts while it would erode the ability of companies and households to service their debt—a very difficult mix for the financial system. Fortunately, the risk of sustained deflation in Canada is low, for several reasons.