September 10, 2008 / 6:36 PM / 9 years ago

Harper wants inflation target extended

TORONTO (Reuters) - Prime Minister Stephen Harper believes the Bank of Canada should stick with its 2 percent inflation target when the current agreement expires in 2011.

<p>Conservative leader and Canada's Prime Minister Stephen Harper delivers a speech to the Indo Chamber of Commerce in Vaughan, Ontario September 10, 2008. REUTERS/Chris Wattie</p>

“I see no reason why we shouldn’t continue with the general inflation targets that we’ve had for the last several years,” Harper told reporters during a campaign stop in Toronto on Wednesday.

Harper has called an election for October 14, launching a campaign in which both the ruling Conservatives and opposition Liberals are trying to portray themselves as the best stewards of a sagging economy.

The central bank sets interest rates with the aim of achieving inflation at the midpoint of a 1 percent to 3 percent range in a horizon of 18 to 24 months.

Inflation jumped to a five-year high of 3.4 percent in July as gasoline prices soared, but the Bank of Canada expects it to fall back to the target in the second half of 2009.

The current agreement runs until the end of 2011 and the central bank is studying the possibility of changing the target after that, which could make it much more reactive to short-term price changes.

It is researching the merits and pitfalls of lowering the target, or changing the scheme so that instead of targeting an inflation rate, it targets a price-level.

Under inflation targeting, the bank does not try to compensate for past mistakes -- if it overshoots the 2 percent target, it does not aim to undershoot the following year but keeps its sights set on returning to the 2 percent target in the medium-term.

Under price-level targeting, the bank would aim for a specific numeric value in the consumer price index and would try to reverse any past deviation from that target.

Writing by Louise Egan; editing by Janet Guttsman

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