Bank of Canada Finds Inflation Target Preferred to Alternatives

Most Canadians prefer the Bank of Canada’s existing inflation targeting mandate to any other alternative frameworks, even though there appears to be an appetite for flexibility.

That’s one of the conclusions from a report released Wednesday by the country’s central bank that summarized findings of public consultations ahead of its mandate review this year.

“Generally, when given the choice between the Bank’s current inflation-targeting approach and an alternative framework, most opted for our existing approach,” the Bank of Canada said. “Participants perceived it to be easy to understand and the most achievable option, given the Bank’s tools.”

Bank of Canada Finds Inflation Target Preferred to Alternatives

The central bank is currently studying potential changes to its 2% inflation target. Options under consideration include some type of average inflation mandate that allows policy makers to make up for periods of below-target inflation. Other possibilities include nominal gross domestic product targeting, raising the target or some type of dual mandate that includes employment. The Ottawa-based bank has been doing a side-by-side assessment of the alternatives.

Every five years, the Bank of Canada and the federal government renew the monetary policy framework. Leading up to this year’s renewal, the bank reached out to a larger number of Canadians and public interest groups to get a better understanding of their concerns about the economy. The consultations included online surveys, focus groups and panels with experts.

Most people supported the continued use of inflation targeting as the Bank’s approach to monetary policy, with flexibility along with adjustments to policy that are gradual. Still “people saw value in the alternative frameworks -- in particular, average inflation targeting and the dual mandate.”

The average inflation targeting mandate was seen as the most feasible, with many respondents doubting the bank’s ability to implement a dual mandate, according to the report.The bank said gathering a more diverse range of views on its frameworks and decisions should lead to better policy outcomes. For the first time in 30 years, the bank is comparing its current inflation targeting framework with several options: average inflation targeting dual mandate, GDP targeting and price level targeting.

Key Findings

  • “Most people we heard from supported the continued use of inflation targeting as the Bank’s approach to monetary policy”
  • “Many felt that the 2 percent target does not accurately represent inflation, pointing to the prices of numerous goods and services that have increased by more than that in recent years”
  • On quantitative easing: “The majority supported this approach and felt the Bank should continue making these purchases as needed”
  • On negative rates: “73% did not think that the Bank should consider negative interest rates if the economy was in trouble”
  • On forward guidance: “67% said giving an interest rate signal is a good idea”
  • Focus group participants raised concerns about the cost of urban housing rising faster than inflation and wages which “make it much harder for people to become homeowners” and “widens the divide between the rich and the poor, which negatively affects social cohesion”

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