MNI INTERVIEW:BOC May Follow Fed, Set Average Inflation Target

Canada's central bank could follow the lead of the Federal Reserve and adopt average inflation targeting, former Bank of Canada adviser Steve Ambler told MNI.

"It wouldn't be a radical change, but it would be an important change," Ambler, a recently-retired professor of economics at l'Universite du Quebec a Montreal who served as a former BOC special adviser in 2007 and helps lead the C.D. Howe think tank's shadow monetary council, said in a phone interview.

"Given the fact the Fed has gone down that road, I don't know... they might surprise us in the same way," he said. But, while the fact that the Fed has moved first on average inflation targeting could allow the Bank of Canada to follow suit without risk of undermining the local dollar, Ambler said the BOC would be unlikely to join it in making other significant changes, such as committing to tackle shortfalls from full employment.

"I would be very surprised at this point if they have a major change in the framework in mind."

The Bank of Canada last week held a workshop with a "horse race" of options to revise its flexible 2% inflation objective, which, in addition to average inflation targeting, also included targeting the price level or GDP, adding an employment mandate, or simply raising the inflation target. A five-year framework with the government expires in 2021, and past reviews have rubber-stamped targets the BOC has met better than most major central banks.

SIMPLE TARGET "GOLDEN"

Senior Deputy Carolyn Wilkins said last week the current target's simplicity is "golden," while highlighting an expanded web survey to gather public opinion. Governor Tiff Macklem told the Jackson Hole conference that amid a pandemic and a growing tendency for public mistrust, policy makers must also look at signs that consumers remember say a jump in meat prices more than signs that overall CPI is weaker.

"They might be trying to see how quickly expectations might adapt if they were thinking about a major change," Ambler said.

Canada was the first G7 central bank to adopt inflation targets in the early 1990s when runaway price increases remained a worry, in a far cry from today's conditions.

The BOC knows the economy may not recover until the end of next year and there may be deeper shifts in potential output as businesses adjust to Covid-19, Ambler said. The government may also adjust the terrain with a push for a less productive "green" economic reset under a new finance minister that boosts debt-to-GDP to a postwar high exceeding 60%.

"I don't know how much more the federal government can actually throw out there," Ambler said, adding that spending on social programs may curb incentives to work.

SECOND DIP DANGER

Ambler, who leads Canada's most prominent working group at C.D. Howe to date recessions, said the shortest and starkest recession in the country's history could see another dip if there is a second wave of the virus.

"Employees and employers still kept their attachment to each other, but now we are looking at in the longer run, adapting to some structural change in the economy," he said. "We're going to be stumbling around trying to figure that out for quite some time."