UPDATE 2-Bank of Canada: Negative rates reduce need to hike inflation goal

Fri Nov 13, 2015 10:15am EST
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(Adds remarks on exchange rates, growth, housing, paragraphs 10-13)

By Euan Rocha

TORONTO Nov 13 (Reuters) - The newly found ability for central banks to have negative policy interest rates diminishes the need for them to raise their inflation targets, a Bank of Canada discussion paper concluded on Friday.

The article was released simultaneously with a speech by the bank's senior deputy governor, Carolyn Wilkins, in which she reiterated the stance that Canada's inflation-targeting framework was working well, "so the bar for change is high."

The text of the speech made no reference to current monetary policy and the paper noted that the views do not reflect its official bank policy.

Next year, the central bank and the Canadian government will renew the bank's five-year inflation-targeting mandate, which currently tries to keep inflation at 2 percent.

Wilkins said given reduced growth potential, the neutral rate of interest is lower than before the global financial crisis. This suggests it is more likely now that policy interest rates will fall to zero if the inflation target is kept at 2 percent, limiting the margin for conventional monetary policy.

But the Bank of Canada research paper, to which she referred in her speech, found that negative policy interest rates restore some maneuver room.

"To the extent that policy interest rates can be reduced meaningfully below zero temporarily with limited costs to financial stability, arguments that the inflation target should be raised in response to a lower neutral interest rate become less powerful, particularly given the costs that permanently higher inflation poses," the paper said.   Continued...