August 25, 2016 / 7:37 PM / 2 years ago

Bank of Canada seen keeping inflation target as Poloz hits Jackson Hole

TORONTO (Reuters) - Canada will likely maintain its 2 percent inflation target and bypass alternative policy goals when the central bank renews its inflation-control agreement this year, strategists say, but the main measure of core inflation may change.

Bank of Canada Governor Stephen Poloz takes part in a news conference in Ottawa, Ontario, Canada, July 13, 2016. REUTERS/Chris Wattie

The Bank of Canada and government set an inflation targeting agreement, which guides the bank’s interest rate decisions, every five years and the next update is this fall. Canada’s annual inflation slowed to 1.3 percent in July.

Stubbornly low inflation and low or sub-zero interest rates in many countries have sparked discussion among global central bankers about alternative policy goals, including price-level and nominal gross domestic product targeting.

“Inflation targeting has worked quite well in Canada, so I think substantive changes are unlikely,” said Andrew Kelvin, senior rates strategist at TD Securities.

Bank of Canada Governor Stephen Poloz said in April that while the threshold for changing the inflation target is high, it is still a “live issue.”

Canada’s benchmark overnight rate has stood at 0.5 percent since July 2015. The ability to lower rates to below zero also reduces the need to change the inflation target, Poloz told Reuters in December.

Some alternative ideas may be discussed at the global central banking conference which begins today in Jackson Hole. Poloz is attending but will not have a speaking role, a spokesperson for the Bank of Canada told Reuters by email.

Still, strategists do not expect alternative policy goals to be adopted this year in Canada but one change that may be in the works is how core inflation is measured.

The Bank of Canada’s main guide for underlying inflation is CPIX, which strips out eight of the most volatile inflation components. CPIX has been at or above 2 percent for all but two months since August 2014 CACPXX=ECI.

The Bank of Canada has been focusing on three alternative measures for the core that use different statistical models, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets, adding he is “pretty sure” a change will occur in the way core inflation is measured.

Financial stability issues, such as household imbalances, will likely be left to macroprudential policies to address, Chandler added.

Additional reporting by Leah Schnurr; Editing by Alan Crosby

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