MNI INTERVIEW: BOC May Keep Target After Fed Struggles-Ragan

The Bank of Canada is likely to stick with its 2% inflation target in a review due next year, despite Covid-19 and after seeing the Federal Reserve struggle to explain its new average-inflation framework, former central bank and finance department adviser Chris Ragan told MNI.

The BOC's existing target and the toolkit of near-zero interest rates, forward guidance and QE has worked fairly well, the McGill University professor said from Montreal, in an interview in which he also argued that the government may soon find generous relief payouts are unaffordable. Even amid the worst slump since at least the Great Depression through the spring Covid-19 lockdown, the annual inflation rate turned negative only briefly.

While the Federal Reserve's move to average-inflation targeting will draw attention, the lack of clarity around how that will be implemented makes it harder for Canada to show enthusiasm, or for the more difficult addition of a dual mandate on full employment, he said.

"The debate is more live, but I don't think the pandemic has changed the technical details of the debate," Ragan said of the BOC's options. Canada already has a lot of the flexibility the Fed sought with inflation averaging, he said.

'AN EVEN WEIRDER THING'

Ragan has been a visiting economist at the BOC and finance department, and is now working on a paper outlining a debate on the BOC's options which was hosted by McGill's Max Bell public policy school. Alternatives include raising or lowing the inflation target or focusing on nominal GDP.

One strong feature of a regular inflation target is the simplicity of explaining it to the public, Ragan said. "There are problems with price-level targeting and nominal GDP targeting. Price level targeting is hard to explain," Ragan said. "Nominal GDP targeting is an even weirder thing."

Canada was the first G7 nation to adopt an inflation target in the 1990s and has been more successful meeting the goal than its peers. Its effective use of QE during the Covid-19 crisis has furnished evidence that fears of running out of ammo with rates stuck around zero are overblown, Ragan suggested.

"You can maintain a system of inflation targeting, and the Bank retains the flexibility to enter into quantitative easing, which means the zero bound really isn't the constraint you think it is," Ragan said. Governor Tiff Macklem has called the current 0.25% rate he expects will be in place into 2023 the "effective lower bound" and all but ruled out negative rates.

MORE FISCAL OPTIONS REVEALED

The pandemic has opened up debate on more options for fiscal policy, Ragan said, citing public discussions about a universal basic income. Prime Minister Justin Trudeau has also put his minority government at risk of a snap election with plans looking at national daycare, a public drug program and fighting climate change.

The government has pledged a "fall" fiscal update, suggesting something before winter officially begins Dec. 21, after a July update putting the deficit at a record CAD343 billion. Ragan said the focus so far seems to be on traditional stimulus rather than the more vital goal of equipping firms and schools to remain open amid new health restrictions. Relief checks for households that raised their incomes by more than 10% in the second quarter appear to have been too generous and likely can't continue, Ragan said.

"The federal government is going to quickly realize they don't have the resources to keep funding the very generous CERB or wage subsidies," he said, referring to two key income support programs. "It just can't go on forever."