April 19, 2016 / 3:27 PM / a year ago

Bank of Canada head says inflation target still 'live issue'

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Bank of Canada Governor Stephen Poloz speaks during a news conference in Ottawa, Canada, April 13, 2016.Chris Wattie

OTTAWA (Reuters) - The Bank of Canada is looking closely at what level of inflation it should aim for as it prepares for talks with the government about renewing its mandate, but the bar to change is still high, Governor Stephen Poloz said on Tuesday.

The central bank reviews its inflation targets, which are set jointly with the Canadian government, every five years. The current target is 2 percent, the midpoint of a 1 percent to 3 percent range.

Poloz reiterated during testimony to a parliamentary finance committee that while the threshold for change is high because the inflation target framework is seen to have worked well, it is still a "live issue".

The bank is also looking at what is the right measure of inflation and how to integrate issues of financial stability, he said.

Poloz said the question of the level was "perhaps the most prominent issue", given that many central banks were forced to reduce rates towards zero after the financial crisis, and a higher inflation target would have left them more room to maneuver.

The possibility of negative interest rates, which also gives more room to act than was previously available, also has to be taken into consideration, Poloz said.

"It's that two sides of the coin which need to be assessed," he said.

Poloz said concrete discussions with the finance department should begin in the next month or two.

It was Poloz's first comments since last week's interest rate decision, which left rates at 0.5 percent, though it flagged the downside risks the economy faces.

Poloz said recent data have been encouraging but quite variable, with no concrete evidence of higher investment and strong creation of firms.

The oil price plunge drove Canada into a brief recession last year, but the economy started 2016 on a better footing. The bank expects to see annualized growth of 2.8 percent in the first quarter before cooling to 1.0 percent in the second.

Asked whether the bank had been too bearish in its forecasts that second-quarter growth will decelerate, Senior Deputy Governor Carolyn Wilkins said the bank sees volatility in inventories and exports potentially contributing to the slowdown.

The recent strength in exports was more than what you would expect given U.S. and foreign demand, Wilkins said.

"So we've taken a cautious approach to that outlook and think that there will be some give back in subsequent quarters."

Additional reporting by David Ljunggren; editing by Franklin Paul and Andrew Hay

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