The Bank of Canada will reassess the basics of its policy

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The Bank of Canada will reassess the basics of its policy
The Bank of Canada will reassess its monetary policy and is ready to make significant changes to it, including abandoning a target for inflation, Carolyn Wilkins (pictured), her first Deputy Governor, said Tuesday. / Photo archives / REUTERS / Chris Wattie
Thomson Reuters

OTTAWA (Reuters) – The Bank of Canada will reassess its monetary policy and is willing to make significant changes to it, including abandoning a target inflation target, Carolyn Wilkins said on Tuesday. Governor.

This review will be completed no later than the end of 2021, when the five-year inflation control agreement between the central bank and the federal government will come to an end.

For 23 years now, the Bank of Canada's inflation target has been set at 2%.

In a speech at McGill University in Montreal, Carolyn Wilkins acknowledged that this strategy "has undoubtedly contributed to the economic and financial well-being of Canadians."

"The ten years of experience accumulated since the crisis, however, have taught us that it is not perfect.It is time to reevaluate the other options," she added.

She explained that the central bank's estimate of the neutral nominal interest rate was lower than before the crisis, which reduces the room for maneuver allowing monetary policy to counter a possible economic slowdown.

This change in the neutral rate also implies that households and investors can be encouraged to take excessive risks.

Some economists, Carolyn Wilkins continued, suggested raising the inflation target to 3% or 4%, for example. But research by the central bank has concluded that the entire population would be affected by higher inflation, especially low-income people, she said.

Another risk of such a recovery: the economic actors could conclude that the objective would be likely to be raised again, which would harm the credibility of the central bank.

"The price to increase the leeway for traditional instruments in times of turbulence seemed too high," she said.

Another possibility would be to set a target for the overall price level instead of an inflation rate, which would leave the central bank with the ability to compensate for a temporary slowdown or a momentary acceleration.

This option could improve the effectiveness of monetary policy but provided that the new regime is "both understood and credible," she said.

She also mentioned the possibility of a dual mandate combining, for example, inflation and employment, and that of a growth rate target for gross domestic product (GDP), adding that these assumptions required "further study".

(David Ljunggren, Marc Angrand for French service)