Bank of Canada rejects jobless targets in mandate

Tue Nov 1, 2011 6:20pm EDT
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By Randall Palmer

OTTAWA (Reuters) - Bank of Canada Governor Mark Carney dismissed the idea on Tuesday of the central bank targeting employment as well as inflation in its mandate, as the U.S. Federal Reserve does, saying that trying to do both can backfire.

Nonetheless, Carney - a front-runner to head the Financial Stability Board, a global bank regulator - did say there might be a need for more flexibility to take broader financial stability into account when the Bank of Canada sets interest rates.

The bank and the federal government are examining whether to expand or adjust the central bank's role as they craft a new five-year mandate for it, which will start in 2012.

"History has shown that if you try to directly affect things like the unemployment rate, as it turns out it has a negative effect on both inflation and employment, and this is in fact what happened in the 1970s," Carney told the House of Commons finance committee.

The left-leaning opposition New Democratic Party said last month that the finance committee would look at whether the Bank of Canada's mandate is broad enough, and whether factors such as employment should be considered.

The bank's only target under its current mandate is an annual inflation rate of 2 percent, with a control range of 1 to 3 percent. By contrast, the Fed has a dual target of low and stable prices and maximum employment.

"The unemployment rate has been lower since we targeted a certain rate of inflation," Carney said. "If you look at other indicators, including the health of financial markets, the health of the labor market, we believe that these figures have improved with our targeted inflation rate."

The main argument for targeting both jobs and inflation is the risk that blind pursuit of stable inflation could lead to unacceptable unemployment rates.   Continued...