Bank of Canada Governor Defends Inflation Target

A week after talking up concerns over consumer debt, Bank of Canada Governor Stephen Poloz has turned his attention to defending the central bank’s inflation target.

Inflation has consistently remained below the Bank of Canada’s 2% target in recent years, but Governor Poloz said during a speech in Montreal Tuesday that fundamental factors are continuing to drive price growth.

In a speech to the Montreal Council on Foreign Relations, Governor Poloz said the fundamental drivers of supply and demand, as well as short-term factors, can explain the movement in prices and that the popular perception that inflation has become ``inexplicable`` is exaggerated.

“In part, this perception reflects a misunderstanding of the accuracy with which economists can predict inflation and a misunderstanding of the precision with which central banks can control it,” he told the assembled audience.

However, Governor Poloz added that there have been a number of one-time factors including below-average food inflation and the Ontario government’s reduction in electricity prices that have helped keep inflation in check this past year.

“The bottom line is that fundamental drivers of inflation, along with some special factors we can identify, can explain the recent behaviour of inflation reasonably well,” said Governor Poloz.

The Bank of Canada aims to keep inflation at 2%, the midpoint of a range of 1% to 3%, by making changes to its key interest rate target.

In keeping its benchmark rate on hold last month, the Bank of Canada said less monetary policy stimulus will likely be required over time, but that it will be cautious in making future adjustments to the policy rate and be guided by incoming economic data.

“A lot of pieces need to fall into place before we can be certain that the economy has made it all the way home,” Governor Poloz said Tuesday.