Below are some key takeaways, via Reuters, from Bank of Canada senior deputy governor Christine Wilkins’ prepared text delivered at a lecture at McGill University in Montreal.
- Bank will review monetary policy framework in run up to late 2021, indicates it is open to considering major changes.
- Inflation targeting has worked well but the decade after the 2008 crisis shows it is not perfect; it is time to thoroughly review alternatives.
- Review will take into account the fact the neutral interest rate is lower than before, which reduces conventional policy firepower in case of a downturn.
- Lower neutral interest rate could also encourage households and investors to take on excessive risk and leaves the economy exposed to boom-bust financial cycles.
- There are several intriguing frameworks that merit further exploration, although none is perfect.
- Raising level of inflation target to 3 or 4 pct would hit people living on fixed incomes, could hit bank’s credibility.
- One option for bank could be to commit to keeping level of aggregate prices on steady growth path, say 2 pct a year; drawback is that the idea is hard to understand.
- Another option is extending bank’s objectives to stabilize employment or nominal income, says “We need to update our analysis of the trade-offs.
- This is why bank will focus on comprehensive side-by-side assessments of alternative frameworks.
- Framework needs to focus only on objectives that monetary policy can actually achieve; monetary policy cannot solve structural issues.
- Bank will also work on options to strengthen its slate of unconventional policy tools, says there is some debate as to whether they are effective at achieving inflation objectives.
- Preliminary research shows stabilization properties of canadian fiscal system do help cut chances of policy rate being below zero.
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