October 20, 2011 / 9:24 PM / 6 years ago

Lawmakers to shine light on Bank of Canada mandate

OTTAWA (Reuters) - Canadian legislators have decided to hold hearings on how the Bank of Canada’s mandate to fight inflation might best be changed even though the deadline for an agreement between the government and the central bank on that issue is near.

<p>The Bank of Canada building is pictured in Ottawa July 19, 2011. REUTERS/Chris Wattie</p>

“We’ll have hearings, we’ll have a good discussion and witnesses to present their views and then the committee will do its due diligence and make any recommendations that we feel are necessary,” Peggy Nash, the opposition New Democratic Party’s finance critic, told reporters on Thursday.

The House of Commons finance committee is controlled by legislators from the governing Conservatives and its recommendations are not binding.

The move also comes a bit late as the central bank’s five-year inflation control target is up for renewal by year-end and an announcement could come as early as November on whether the government and the Bank of Canada will keep it as it is or modify it.

The bank targets an annual inflation rate of 2 percent, with a control range of 1 to 3 percent. Unlike the U.S. Federal Reserve, which targets low and stable prices and maximum employment, the Bank of Canada’s only mandate is inflation control.

“We’re going to look at a variety of factors, we’re going to see whether the mandate is broad enough or whether there should be other factors like employment,” Nash said.

For the past five years the central bank has spearheaded a research effort into three specific questions with a view to possible tweaks to its mandate. A possible employment target is not one of issues being studied.

* It has looked at the costs and benefits of lowering the inflation target from 2 percent.

* It has asked whether it would be beneficial to replace the inflation target with a longer-term price-level target. Price-targeting takes account of past moves in prices in setting policy, so if inflation is higher than the 2 percent target for a period, as it is now, the central bank would try to have inflation below 2 percent for the same length of time.

* It has considered whether its mandate should explicitly acknowledge a role for monetary policy in combating asset bubbles. This point refers to a new vein of thinking in central banking since the global crisis that financial stability is just as important as overall economic health. Therefore policymakers should lean against asset bubbles, such as the U.S. housing crisis, rather than just “clean up” afterward.

The final point has gained the most traction, and some analysts have said it is likely to be reflected in the new mandate.

Fed Chairman Ben Bernanke said this week he thought central banks may need to use monetary policy to support financial stability.

Reporting by Louise Egan; editing by Peter Galloway

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