Bank of Canada may sometimes "sacrifice" inflation

Wed Nov 9, 2011 10:30am EST
 
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OTTAWA (Reuters) - Exceptional circumstances may require the Bank of Canada to allow short-term deviations from its inflation target in order to combat financial instability, the central bank said on Wednesday in outlining its new five-year mandate.

The argument is that financial instability, stemming for example from excess credit leading to an asset bubble, could prevent the bank from being able to keep inflation stable over the long term.

"The global economic crisis delivered a powerful reminder that price stability and financial stability are inextricably linked, and that pursuing the first without due regard for the second risks achieving neither," it said in its new policy paper.

The bank said this could require it to be flexible in terms of how long it is prepared to let inflation stray from the 2 percent target.

"While this flexibility might involve sacrificing some inflation performance over the usual policy horizon, it would lead to greater financial, economic and, ultimately, price stability over a somewhat longer horizon."

The federal government and the Bank of Canada on Tuesday announced their agreement to continue targeting an annual inflation rate of 2 percent within a control range of 1 to 3 percent. Tuesday's statement made no mention of flexibility in the timeline for returning inflation to target, of any role for monetary policy in ensuring financial stability. (Reporting by Randall Palmer; editing by Louise Egan)