(Recasts throughout with speech)
NEW YORK, Nov 15 (Reuters) - A cautious approach to monetary policy may be prudent during times of uncertainty like today, but caution has its limits because the trade-off can be financial instability, Bank of Canada Senior Deputy Governor Carolyn Wilkins said on Wednesday.
Explaining how central banks make decisions amid uncertainty, Wilkins said policy may respond to negative shocks more aggressively than usual when interest rates are low, while a cautious approach is prudent when it is not clear how rate moves will affect spending.
"Another reason for caution - in this case more of a 'wait and see' approach - is related to a desire to avoid having to reverse policy direction abruptly in the future," Wilkins said in prepared notes for a speech in New York.
Wilkins said the bank is particularly focused on data that indicate how wages and potential output are progressing, as well as the effects of its July and September rate hikes and the renegotiations of the North American Free Trade Agreement.
"Caution has its limits, because there are complex trade-offs involved, including those related to financial stability," Wilkins said.
She also said the bank would adjust the way it communicates by having members of the Governing Council provide economic updates in speeches between the quarterly Monetary Policy Reports, and hold news conferences after those speeches, beginning in 2018.
"If you want to understand why policy actions were taken and what actions might be in store, you need to understand both the bank's base-case projection and how the bank has factored uncertainty into its policy decisions," Wilkins said.
While policymakers have recently said every policy meeting is "live," some observers had believed the bank was more inclined to move rates when it could use a news conference to explain its decision.
Wilkins said monetary policy becomes asymmetric when uncertainty is embraced, responding more aggressively to negative shocks when rates are near the effective lower bound (ELB) than when they are far from it.
"And the reality is that we will be closer to the ELB more often than in the past because of a lower neutral rate of interest," she said.
One reason for caution is that inflation has been in the lower end of the bank's 1-to-3 percent inflation target for "quite some time", Wilkins said, noting the bank puts a greater weight on downside risks when inflation is low to begin with. (Reporting by Andrea Hopkins and Stephanie Kelly; Editing by Chizu Nomiyama and James Dalgleish)