May 19, 2015 / 4:23 PM / 4 years ago

Bank of Canada says 2 percent inflation target working well

CHARLOTTETOWN, Prince Edward Island (Reuters) - Bank of Canada Governor Stephen Poloz said on Tuesday that the central bank’s 2 percent inflation target has “served us extremely well,” but added it was still important to look at research on whether it should be changed.

Pedestrians are reflected in a window while walking past the Bank of Canada office in Ottawa March 4, 2015. REUTERS/Chris Wattie

The inflation-targeting regime comes up for a five-year renewal next year, and one thing being considered is whether the central bank needs a higher target to give more room for cutting interest rates in a crisis.

“The bar is high to change it, but that doesn’t mean that we shouldn’t at least examine carefully what new thinking might be around those parameters, including such things as how we formally integrate it with financial stability issues,” Poloz told reporters. His statement echoed recent comments from other Bank of Canada officials.

One problem for central banks confronting the 2008-09 financial crisis was cutting interest rates below zero. Central banks had limited room to maneuver, but certain reforms have made a similar shock less likely, Poloz said.

“And through the events of the past year or so, we have learned the zero lower bound may not be as hard as we imagined it was in theory,” he added, in a reference to negative interest rates in some parts of Europe.

Poloz was still bullish Canada’s economy would recover from cheaper oil prices, with growth expected to resume this quarter and a positive second half, leading to full capacity by end-2016.

“The January interest rate cut is working,” he said in a speech to a business audience, reiterating that the oil price shock was coming earlier than expected, but would not be larger.

Poloz surprised markets with the rate cut, and said on Tuesday there had not been time to prepare the ground.

The categories of non-energy exports the bank had said should lead the recovery are in fact leading, growing 9 percent, he added.

The bank’s forecast is predicated to some extent on the U.S. economy recovering from a soft first quarter. He gave a mixed review of prospects there: factors such as weather and the port disruptions were temporary, but “certain elements look less so.”

He also noted that uncertainty over both oil prices and the Canadian dollar moved higher recently.

“We don’t have a bridge, so in fact the economy can’t avoid ... choppy waters. However, there are signs that we’re headed in the right direction,” he added.

Additional reporting by Leah Schnurr and David Ljunggren in Ottawa and Andrea Hopkins, Alastair Sharp and Solarina Ho in Toronto; Editing by Paul Simao, Jeffrey Hodgson and Andre Grenon

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