Bank of Canada To Review Its Current Focus On Inflation Targets

The Bank of Canada is undertaking a thorough review of its inflation target to see if a new framework and mandate might work better.

In a speech delivered Tuesday afternoon in Montreal, Bank of Canada Senior Deputy Governor Carolyn Wilkins said the central bank will do a "side-by-side assessment" of alternatives to its inflation target regime. The current framework faces a serious challenge from historically low neutral rates, which may diminish the bank’s ability to combat future downturns and encourages households to take on high levels of debt.

"There is no doubt that our inflation-targeting framework has promoted the economic and financial well-being of Canadians," Wilkins said in prepared remarks. "A decade of experience in the post-crisis world, though, shows us it is not perfect. It is time to conduct a thorough review of the alternatives."

The comments are the strongest indication yet that the Bank of Canada will seriously consider changes to a framework that came into effect in the early 1990s and requires the central bank to narrowly focus on a single objective: to keep inflation at 2%, a level that is believed to keep prices throughout the economy stable.

The central bank typically aims for a 2% inflation target over its "forecast horizon," which is about two years. But the focus on inflation targeting and price stability has been criticized for fueling the financial imbalances that led to the last global crisis in 2008, and also proved to be insufficient in giving economies enough firepower to help recover after the Great Recession.

Wilkins said the Bank of Canada will use three criteria to assess alternatives: short-term stabilization and cyclical issues rather than long-term matters, income distribution and financial stability, and the need for monetary policy to be robust in bad times as well as good times.

The Bank of Canada will also examine how to improve clarity around its toolkit of unconventional policies, which will be needed regardless of what framework is in place, Wilkins said.