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Bank of Canada sees no obvious alternative to inflation targeting - senior deputy governor

Credit: REUTERS/POOL

No obvious front-runner has emerged among monetary policy alternatives to inflation targeting as the Bank of Canada reviews its options ahead of next year's renewal, the Bank's senior deputy governor said on Wednesday.

By Julie Gordon and Kelsey Johnson

OTTAWA, Aug 26 (Reuters) - No obvious front-runner has emerged among monetary policy alternatives to inflation targeting as the Bank of Canada reviews its options ahead of next year's renewal, the Bank's senior deputy governor said on Wednesday.

At the same time, the coronavirus pandemic has crystallized that central banks are "likely to run out of conventional firepower" to address economic downturns in a low-interest-rate world, Carolyn Wilkins said in opening remarks at a central bank workshop.

The bank has tried to keep Canada's annual inflation rate at 2% since the early 1990s, a goal that it reviews jointly with the federal government every five years. In the lead up to next year's renewal, the bank is reviewing four alternate frameworks, along with the option of raising the inflation target.

"We've identified some of the strengths and weaknesses of the different frameworks. But at this point, no single framework dominates on all margins," Wilkins said.

In its review, the Bank of Canada is considering how well the alternatives achieve economic stability, along with criteria such as how they impact the distribution of income and wealth, and their robustness in good and bad economic times, Wilkins said.

Central banks around the world are mulling their monetary policy frameworks as inflation has faltered, global debt-to-GDP has surged, and low benchmark interest rates leave central bankers with little ammunition to fight recessions.

The Bank of Canada slashed its policy rate three times in March to 0.25%, its effective lower bound, and has said rates will stay low for at least two years.

Despite the challenges, Wilkins noted that inflation targeting has served the bank well through the pandemic.

"The fact we have a clear and simple framework is golden," she said.

Her remarks follow a speech Tuesday by Deputy Governor Lawrence Schembri, who said the economic shock of the pandemic will test public confidence in the inflation target.

The Canadian dollar hit a two-day high of 1.3146 to the greenback, or 76.07 U.S. cents, buoyed by strong oil prices.

(Reporting by Julie Gordon and Kelsey Johnson in Ottawa; Additional reporting by Saqib Ahmed in New York; Editing by Will Dunham)

((julie.gordon@thomsonreuters.com; 613-235-6745; Reuters Messaging: julie.gordon.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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