Higher interest rate target? Expanded mandate? BoC explores options for policy framework

The Bank of Canada is studying whether it should make changes to the framework that has underpinned its policy decisions — such as interest-rate movements — for several decades. In a speech Tuesday, senior deputy governor Carolyn Wilkins said the current inflation-targeting approach has improved the economic and financial well-being of Canadians since it was established in 1991. But after a decade in the post-financial-crisis environment, she said it has become clear there are also down sides to the bank’s mandate of helping inflation stay close to its target of two per cent. “There are a couple of challenges facing our framework that mean it may not serve the economic and financial welfare of Canada in the future as well as it has in the past,” Wilkins said in her address at McGill University in Montreal. One key issue, she noted, is that interest rates are no longer expected to rise as high as they had been before the crisis, which means there will be less room for the bank to cut rates in an economic downturn. It has said it expects its benchmark rate to settle somewhere between 2.5 and 3.5 per cent, about two percentage points lower than where it was in the early 2000s. Another concern about the current framework, Wilkins said, is that lower rates may entice Canadians and investors to take on excessive risk — leaving the economy exposed to the ups and downs of financial cycles. She said the Bank of Canada is conducting research on alternative frameworks, including a higher target for inflation and a more flexible, dual mandate that would extend the bank’s focus to also incorporate labour and other economic indicators. The work is underway in the leadup to the BoC’s next five-year renewal of its inflation-control pact with the government set for 2021.