May 11, 2012 / 1:02 AM / in 6 years

Bank of Canada's Carney rejects higher-inflation policies

LONDON (Reuters) - Bank of Canada Governor Mark Carney said on Friday that now is not the time for central banks to abandon trusted frameworks, such as flexible inflation targeting, with “low-for-long” policies.

Bank of Canada Governor Mark Carney waits to testify before the Senate banking committee in Ottawa April 25, 2012. REUTERS/Chris Wattie

Carney said that although current frameworks do not guarantee financial stability, pursuing a policy of temporary higher inflation is an uncertain and extreme response.

“Moving temporarily to a higher inflation target risks un-anchoring inflation expectations and squandering the hard-won gains of entrenched price stability,” Carney said in the opinion piece in the Financial Times.

“Higher and more uncertain inflation raises risk premiums and real interest rates, and worsens debt dynamics,” said Carney, who also chairs the G20’s Financial Stability Board.

He questioned the effectiveness of a new monetary regime against flexible inflation targeting, which he described as “the most successful monetary policy idea in history.”

“Central banks are most effective when they operate with clear and stable objectives.”

“The pursuit of temporarily higher inflation could only work if policy were anchored to a new target, such as nominal gross domestic product - total output at market prices, unadjusted for inflation,” said Carney.

Reporting by Stephen Mangan; Editing by Eric Walsh

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