Canada seen as unlikely to tamper with inflation target during review

Wed May 13, 2015 4:27pm EDT
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By Randall Palmer and Leah Schnurr

OTTAWA (Reuters) - Canadian financial authorities are unlikely to raise the country's inflation target after a review this year given the risk to the central bank's credibility and widespread support for the existing benchmark, economists say.

The Bank of Canada, which reviews the target every five years, flagged in November that it was researching whether to raise the target above 2 percent, given the difficulties of conducting monetary policy with interest rates near zero.

Governor Stephen Poloz said in February that 2 percent had proven itself in delivering superior outcomes, "so that means it's a pretty high bar to change that and replace it with something else."

Many investors are also wary of another unorthodox move from the central bank after a January rate cut decision that caught nearly everyone off guard.

A decision to raise the target, which must be made jointly with the Department of Finance, is seen as a hard sell politically, given that it would erode savings and purchasing power.

"That's a very difficult communication challenge ... how to communicate to the public that more inflation is better for them," said Emanuella Enenajor, an economist at Bank of America-Merrill Lynch.

Conservative Finance Minister Joe Oliver, asked in New York on Wednesday about raising the target, was non-committal, noting the current target "has served us well, but this review looks forward."

The bank introduced the 2 percent target in the early 1990s after an aggressive campaign to tame inflation in the 1980s came at an enormous cost to output and employment.   Continued...

A man walks past the Bank of Canada office in Ottawa March 4, 2015.  REUTERS/Chris Wattie