MNI INTERVIEW: BOC Should Extend 2% CPI Goal, Ex-Adviser Says

The Bank of Canada should keep a 2% inflation target little changed despite some of the loudest chatter in three decades about widening its scope to incorporate goals such as employment, former central bank and government adviser Chris Ragan told MNI.

Expanding the remit could overburden the BOC and be seen as political interference amid a quadrupling of the balance sheet in tandem with deficits aimed at easing the pandemic, he said in an interview. Governor Tiff Macklem and Finance Minister Chrystia Freeland are supposed to refresh the five-year agreement on the central bank's mandate by yearend.

The present system has successfully eased the deep shock of the pandemic, Ragan said.

“The last 18 months is a great example of how flexible an inflation-targeting system is,” Ragan said. “Macklem is still talking about maintaining his 2% target. He is absolutely relying on the word flexible in that system.” Ragan has been a visiting BOC and finance department economist and heads McGill University's Max Bell policy school where he recently hosted a debate on renewal options.

Macklem has suggested the bar for change is high while the BOC has studied average-inflation targeting, price-level targeting, and a dual mandate to take on employment and GDP targets. Minister Freeland last week in response to a question from MNI about the mandate said "I have many views on that issue," and "a lot of smart people have a lot of smart and often divergent ideas."

CONFLICTING GOALS? "YOU'RE COOKED"

Adding a job target could leave policy makers chasing sometimes conflicting goals, and fiscal policy is much better equipped to drive the labor market, Ragan said. "You might have your inflation target and your unemployment target pointing you in different directions, at which point the question is which one wins?” Ragan asked. "You're cooked."

The Bank of Canada could also end up being accountable for shifts in unemployment brought on by government changes in social or economic policies, he said.

Prime Minister Justin Trudeau said while campaigning for a September election the BOC mandate is a low priority for him amid the stack of policies the government deployed in the pandemic. Some observers think the government could pressure the BOC to dilute its focus on inflation in order to favor its financing costs (see MNI INTERVIEW: BOC May Adjust Target As Spending Pledges Mount), but the opposition Conservatives demand Trudeau’s Liberals refrain from adding new central bank tasks amid the fastest inflation in decades, warning the BOC has already been politicized by "printing money" astride record deficits.

“This is a bad time to change a mandate, given the massive amount of uncertainty, and this possibility that maybe central banks are coming under pressure from governments," Ragan said. A perceived loss of independence could also rattle bond yields and price expectations, making inflation targeting harder, he said.

HOPING BOTTLENECKS WILL PASS

Keeping the current system likely means “financial markets would look at that and think, that’s okay, now we know what to expect,” Ragan said.

Speaking on Friday before reports several cases of a new Covid variant were reported in Canada, Ragan said Macklem has a tough job figuring out the economy's path back to hiking the 0.25% interest rate. The BOC says it could see favorable conditions as soon as April in the form of stable 2% inflation and full output.

"You don't really know how much of the inflation we're seeing is a supply chain disruption, and how much of it is demand driven, whether it's pent-up demand or demand driven from monetary policy. The bank wants to respond to the second and not the first,” Ragan said. “He’s kind of hoping that the supply chain disruption stuff only lasts for a few months. And then he can start to really respond to the demand side.”