October 27, 2015 / 4:07 PM / 2 years ago

UPDATE 2-Bank of Canada looks at alternate inflation measures

3 Min Read

(Adds remarks on no current need for further monetary policy support)

By Richard Woodbury

HALIFAX, Nova Scotia, Oct 27 (Reuters) - The Bank of Canada on Tuesday outlined possible alternative measures of inflation to help guide it in setting interest rates, but said it would not make any big changes to its framework unless necessary.

Deputy Governor Timothy Lane also said that while global experience had shown that quantitative easing and other central bank tools can be effective, the Bank of Canada was assuming they would not be necessary domestically at present.

"Analytically we've been considering what the options would be but obviously our current baseline is that our current level of monetary policy stimulus is appropriate and we don't see a need to provide further monetary policy support at this time," Lane said after giving a speech in Halifax.

The question of what inflation measures to use to guide monetary policy has taken on an increased profile ahead of the renewal late next year of the agreement on inflation targeting between the federal government and the Bank of Canada.

Referring to possible changes in the inflation-targeting framework, Lane said in his speech: "The bar for any major change is very high."

Even so, he referred to a paper the central bank was publishing simultaneously which found that traditional measures of core inflation based on excluding a fixed group of components "perform relatively poorly."

The official target is to keep overall inflation to 2 percent, but operationally the bank uses as its guide a core measure of inflation, known as CPIX, that excludes eight volatile components and the effect of indirect tax changes.

That ran at 2.1 percent in September, but Lane reiterated the bank's new emphasis on what it calls underlying inflation, which it sees at 1.5 to 1.7 percent, because it excludes exchange rate effects and one-off factors.

The central bank research paper said exclusion-based measures like CPIX are easy to explain and have played a useful role.

But it listed three different measures that perform better in capturing persistent price movements and tend to move with important economic drivers: trimmed mean, weighted median and common component.

Definitions are found in the paper: (bit.ly/1k7eVql).

In a question-and-answer session, Lane also said that while exports have picked up recently, previous strength in the Canadian dollar had meant the disappearance of a number of exporters, and new firms might be needed for major surges in exports. (Reporting by Richard Woodbury; Writing by Randall Palmer and Leah Schnurr; Editing by David Gregorio)

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