MNI POLICY: BOC Studies GDP Goal, Weighting Past CPI For 2021>

By Greg Quinn and Anahita Alinejad

     OTTAWA (MNI) - The Bank of Canada is studying a nominal GDP target 

and putting more weight on past inflation during a review of its 2% 

inflation goal that's up for renewal next year, Senior Deputy Governor 

Carolyn Wilkins said Wednesday. 

     The global use of tools like QE and negative rates is also being 

studied, and it's still unclear what their long-term effects are, 

Wilkins said in a speech in Toronto. Canada avoided most of those 

extraordinary tools in the 2008 financial crisis, and some of them are 

still in use abroad more than a decade later. 

     Wilkins didn't give a near-term outlook for the BOC's 1.75% 

benchmark rate, which Governor Stephen Poloz said last month could be 

cut as global trade tensions may be seeping into domestic spending. She 

did say Canada isn't at risk of Japan-style stagnation, citing on-target 

inflation, low unemployment, stable banks and rising wages. The global 

economy still faces a high level of political and trade uncertainty, 

including the coronavirus outbreak, she said. 

     Canada was the second nation to adopt an inflation target in the 

early 1990s and its long track record of success keeping price gains 

near 2% is a big reason why past renewals of five-year agreements with 

the federal government have avoided major changes. Wilkins' speech laid 

out how the global era of falling neutral rates affects all central 

banks, meaning even Canada has much less room for rate cuts to deal with 

any future downturn. 

     "We can navigate a world with low neutral interest rates. To do so, 

we need the right monetary policy framework and tools in place," Wilkins 

said, without indicating if any particular new tool would be adopted.

     Potential growth rates in advanced economies including Canada have 

fallen to about 2% from 3% in the 1990s, and central banks have 200bps 

less room for rate cuts, she said. Neutral interest rates have fallen 

from greater than 5% in the early 2000s to below 3% today. 

Here are highlights of the BOC's inflation target renewal study:

-"One possible guide for policy could be to put more weight on past 

inflation outcomes. For instance, the central bank could make up for 

periods of below-target inflation by temporarily aiming for inflation to 

be above the target, and vice versa. This could give the central bank 

more room to manoeuvre by creating expectations that monetary policy 

will be stimulative for longer. We're looking at other policy frameworks 

too. Targeting nominal gross domestic product (GDP) could also give 

monetary policy more room to manoeuvre. And, a dual mandate where we'd 

target inflation and full employment could foster a more stable 

environment for jobs."

-"We're looking at other policy frameworks too. Targeting nominal 

gross domestic product (GDP) could also give monetary policy more room 

to manoeuvre. And, a dual mandate where we'd target inflation and full 

employment could foster a more stable environment for jobs."

-"The second pillar of our review is refining our tool kit. Over 

the past decade, central banks around the world have deployed a range of 

tools, including forward guidance about the interest rate path, negative 

nominal interest rates and large-scale asset purchases or quantitative 

easing (QE). These and other measures have been used in the United 

States, Europe and Japan, among others. It's been long enough to tell 

that they prevented far worse economic outcomes. And, they can alleviate 

the effects of being stuck near the effective lower bound for interest 

rates. Even so, it's too early to know what the long-term consequences 

are when they're used for an extended period." 

--MNI Ottawa Bureau, +1-613-314-9647, greg.quinn@marketnews.com

[TOPICS: M$C$$$,MACDS$]