MNI POLICY: BOC Calls Simple CPI Target "Golden" Amid Review

The Bank of Canada said Wednesday its 2% inflation target is working well during the pandemic and signaled a high bar for changes in a renewal due next year, even as it mulls alternatives such as price-level targeting.

The current framework with a clear single goal has been "golden" in the downturn, Senior Deputy Governor Carolyn Wilkins said in the text of a speech in Ottawa. The flexibility the BOC has in how long it takes to return to target is also useful when there are strains in job creation or financial markets, she said.

The opening remarks for a conference to simulate a "horse race" of options like average inflation targeting or a nominal GDP target didn't provide an outlook for the current 0.25% policy rate, which officials have signaled will remain in place for at least two years. Wilkins said other potential target options include raising the inflation goal and creating a dual mandate to include employment. Such candidates have been passed over since Canada became the first G7 nation to adopt an inflation target in the early 1990s.

Canada sets its inflation target under five-year agreements with the federal government, and Wilkins said the pandemic has heightened the need for fiscal and monetary cooperation for the BOC to meet its inflation mandate.

Low Firepower

"Central banks are likely to run out of conventional firepower if we see an economic downturn in a low-interest-rate world," she said. "Another challenge is that long periods of low interest rates encourage investors to take on risk that may be excessive."

One area of increased research is why consumers perceive inflation to be higher than the Consumer Price Index suggests, something another deputy devoted a speech to on Tuesday. Wilkins said the pandemic has made this gap even more prominent, citing meat prices gaining 4% since February while overall inflation is about zero.

Canada recently tweaked core inflation indexes to refine tracking of price gains, and those measures have slowed far less than the headline rate this year. Inflation figures in Canada are prepared by Statistics Canada, and the the BOC is working with that agency on research into how consumers perceive price gains.

"It's critical that we measure inflation as accurately as possible so Canadians have confidence in our target; and we must address public perceptions in our analysis and communications," Wilkins said.