Bank of Canada report keen on lower inflation goal

Thu May 21, 2009 3:29pm EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Randall Palmer

OTTAWA (Reuters) - Cutting the Bank of Canada's inflation target would likely be a good idea, a research paper done by the central bank said on Thursday, hinting at a move that would have a big impact on markets and the economy.

The Bank of Canada, which aims to keep inflation near the midpoint of a 1 to 3 percent range, agreed with the federal government in 2006 to stick with this target until the end of 2011. But it said at the time it would research potential improvements.

The new paper, published Thursday in the quarterly Bank of Canada Review, suggested the economy may operate more smoothly if the central bank kept an even tighter lid on rising prices.

"The earlier literature and recent studies at the Bank of Canada suggest that an inflation target lower than 2 percent may be beneficial," it said.

"An inflation target below 2 percent is likely preferable to the status quo," said the paper, entitled "Next Steps for Canadian Monetary Policy."

Bank of Canada Deputy Governor John Murray said in an introduction to the current review that further work would be done to examine the conclusions. He also said the optimal inflation rate varies from study to study.

The central bank has noted in the past that even at 2 percent the erosion of purchasing power can still pose a serious problem on a cumulative basis, particularly for pensioners on fixed incomes.

While the review has no near-term monetary policy implications, it can be used to handicap the odds that Canada might eventually pursue a lower inflation target, or a different means of addressing prices altogether, said Eric Lascelles, chief economics and rates strategist for TD Securities.   Continued...