BoC charts course with eye on past
• When it comes to monetary policy, there appear to be few limits to innovation, both during and after the global economic and financial meltdown between 2007-09.
“Confident as we are in how we do things,” says Canada’s No. 2 monetary policy-maker, the bank of Canada is examining how other countries reacted to that crisis while it “keeps its eyes on the future.”
“One important challenge for central banks now is that conventional monetary policy is stretched to its limits in some countries, where policy interest rates are at, or below, zero,” Carol Wilkins, the central bank’s senior deputy governor, said Friday.
“because of this, a number of countries are using innovative monetary policy measures to return inflation to target,” she said in a speech to the rotman School of management and the munk School of Global Affairs in Toronto.
“Canada was fortunate to avoid the worst of the (2007-09) crisis, thanks to the relative strength of our economy, our prudently managed and resilient financial system, and wellanchored inflation expectations.”
but now, given concerns over renewed global economic weakness, “it’s not surprising that we are focusing our research firepower on the monetary lessons from the (previous) crisis,” Wilkins said.
Innovation is a recurring theme among monetary policy-makers — even more so than before, due to recent global economic growth concerns that are presenting some new challenges.
For the bank of Canada, much of its focus has been on inflation-targeting and, since 1991, that has been the prime policy concern when steering overnight borrowing costs for financial institutions through adjustments to the central bank’s key lending rate — now at 0.5 per cent.
Its main policy goal is to guide price movements toward the central bank’s target — currently at two per cent, the midway point of its comfort zone between one and three per cent. The policy is reviewed every five years by the bank and the Finance ministry, with the process to begin again in 2016. Ahead of that decision, central bank researchers — along with academics — are “assessing how effective other innovative monetary policy measures have been.” Some initial staff research findings were released Friday.
“These days, most central bankers see inflation-targeting as a success,” Wilkins said in her speech.
“The current inflation-targeting framework is working well, so the bar for change is high. but history tells us we can’t cling indefinitely to a particular way of doing business,” she said.
“I wish I could say that was the end of the story. In reality, this success probably distracted central banks from confronting the hard questions about the buildup in financial risks that led to the global crisis. It’s a stern reminder that we must resist confirmation bias and complacency.”
Wilkins said innovation has driven monetary policy, such as the bank of Canada’s use of so-called “forward guidance” — in which the direction of rates and policy actions is clearly indicated — during the worst of the country’s 2008-09 recession. but Canada managed to avoid other, more-aggressive actions taken by some countries — such as purchasing corporate bonds and mortgagebacked securities to help ensure financial market stability.
The challenge now, Wilkins noted, is to ensure monetary policies keep pace with “technological and social trends, as well as post-crisis regulatory reforms.”