Canada

Wednesday, February 5, 2020 - 12:15

MNI POLICY: BOC Studies GDP Goal, Weighting Past CPI For 2021


By Greg Quinn and Anahita Alinejad

OTTAWA (MNI) - The Bank of Canada is studying a nominal GDP target and putting more weight on past inflation during a review of its 2% inflation goal that's up for renewal next year, Senior Deputy Governor Carolyn Wilkins said Wednesday.

The global use of tools like QE and negative rates is also being studied, and it's still unclear what their long-term effects are, Wilkins said in a speech in Toronto. Canada avoided most of those extraordinary tools in the 2008 financial crisis, and some of them are still in use abroad more than a decade later.

Wilkins didn't give a near-term outlook for the BOC's 1.75% benchmark rate, which Governor Stephen Poloz said last month could be cut as global trade tensions may be seeping into domestic spending. She did say Canada isn't at risk of Japan-style stagnation, citing on-target inflation, low unemployment, stable banks and rising wages. The global economy still faces a high level of political and trade uncertainty, including the coronavirus outbreak, she said.

Canada was the second nation to adopt an inflation target in the early 1990s and its long track record of success keeping price gains near 2% is a big reason why past renewals of five-year agreements with the federal government have avoided major changes. Wilkins' speech laid out how the global era of falling neutral rates affects all central banks, meaning even Canada has much less room for rate cuts to deal with any future downturn.

"We can navigate a world with low neutral interest rates. To do so, we need the right monetary policy framework and tools in place," Wilkins said, without indicating if any particular new tool would be adopted.

Potential growth rates in advanced economies including Canada have fallen to about 2% from 3% in the 1990s, and central banks have 200bps less room for rate cuts, she said. Neutral interest rates have fallen from greater than 5% in the early 2000s to below 3% today.

Here are highlights of the BOC's inflation target renewal study:

-"One possible guide for policy could be to put more weight on past inflation outcomes. For instance, the central bank could make up for periods of below-target inflation by temporarily aiming for inflation to be above the target, and vice versa. This could give the central bank more room to manoeuvre by creating expectations that monetary policy will be stimulative for longer. We're looking at other policy frameworks too. Targeting nominal gross domestic product (GDP) could also give monetary policy more room to manoeuvre. And, a dual mandate where we'd target inflation and full employment could foster a more stable environment for jobs."

-"We're looking at other policy frameworks too. Targeting nominal gross domestic product (GDP) could also give monetary policy more room to manoeuvre. And, a dual mandate where we'd target inflation and full employment could foster a more stable environment for jobs."

-"The second pillar of our review is refining our tool kit. Over the past decade, central banks around the world have deployed a range of tools, including forward guidance about the interest rate path, negative nominal interest rates and large-scale asset purchases or quantitative easing (QE). These and other measures have been used in the United States, Europe and Japan, among others. It's been long enough to tell that they prevented far worse economic outcomes. And, they can alleviate the effects of being stuck near the effective lower bound for interest rates. Even so, it's too early to know what the long-term consequences are when they're used for an extended period."

--MNI Ottawa Bureau, +1-613-314-9647, greg.quinn@marketnews.com

[TOPICS: M$C$$$,MACDS$]

Please log in to read and leave comments