MNI POLICY:BOC To Do Side-By-Side Assessment of Pol Framewrks>

By Courtney Tower

     OTTAWA (MNI) - Following are the key points from a Montreal speech 

Tuesday by Carolyn Wilkins, senior deputy governor of the Bank of 

Canada, on the review of the BOC's present inflation-control policy 

framework: 

     - The BOC renews its policy mandate with the federal government 

every five years, with the next renewal in 2021. Wilkins laid out for an 

audience at McGill University the BOC's position that the present policy 

of targeting 2% inflation within a 1%-3% control range, in effect since 

1991, has worked well for Canada but "it is not perfect." Nor are the 

different alternatives, among which are raising the inflation target, 

moving from inflation control to price-level targeting, or going from 

the single inflation-control mandate to a dual mandate of inflation 

control plus desired employment level or nominal income. 

     - Wilkins said it is time to review key alternatives all 

side-by-side, both internally and with academics and financial system 

experts. The present mandate faces the challenge of the low neutral rate 

of interest, now estimated  to be in the 2.5% to 3.5% range, being about 

2 percentage points lower than in the early 2000s. This means that "the 

central bank is more likely to run out of conventional firepower in the 

event of an economic downturn," a probability estimated at about 13% 

today by the Bank's staff. Also, the lower neutral rate might  

"encourage households and investors to take on excessive risk" and 

create boom-best economic cycles that "monetary policy is ill-suited to 

dealing with." 

     - Raising the level of the inflation target is proposed by some 

economists. Bank researchers had found in preparing for the present 

mandate that "higher inflation would be felt by everyone and most 

acutely by people living on fixed or lower incomes." And the central 

bank's present high level of credibility would be undermined. 

     - Variations of price-level targeting also were studied by the Bank 

and rejected for the current mandate. There could be benefits from 

keeping the aggregate level of prices on a steady growth path by  

targeting an average inflation rate over the medium term and making up 

for undershoots or overshoots by changing the policy interest rate. A 

major issue, however, is that this practice is very difficult for the 

public to understand and thus retain confidence in the system. A third 

option, of adopting a dual mandate as does the Federal Reserve, has been 

judged to be of a complexity "not worth the risk that comes with getting 

into territory better left to elected officials." Wilkins She added the 

current BOC framework already considers labor-market indicators as well 

as other economic measures in setting policy. 

     - The framework, Wilkins said, should focus on clear and achievable 

objectives. It should also, ideally, rest "on a foundation where other 

policies that affect economic and financial stability complement 

monetary policy objectives." She pointed out that fiscal stabilizers 

reduce the chances of the policy rate being negative. 

 --MNI Ottawa Bureau; yali.ndiaye@marketnews.com 

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