Bank of Canada eyes next inflation target

• Less than a year since completing the last review of its inflation-targeting mandate, the Bank of Canada is starting to prepare for the next one in 2021.

Consultations kick off in Ottawa on Sept. 14 with an invitation- only workshop of economists that will be webcast on the central bank’s website. It’s an early public start to the process, and comes amid a growing sense that a deeper look at the inflation target is needed.

For example, an argument could be made the bank kept monetary policy too tight. It consistently predicted much better outcomes, and set its monetary policy accordingly to keep a lid on inflation. But inflation never materialized, and the economy continued to fall below expectations.

Since the 1990s, the bank has been narrowly focused on a single objective: to keep prices stable. Operationally, that means aiming for a twoper-cent inflation target over its so-called forecast horizon, a period of about two years.

If it looks like inflation is heading above target, the bank would generally interpret that as a signal higher interest rates are required to cool the economy. Likewise, inflation heading below target usually signals lower rates are needed.

Low inflation is baffling authorities throughout the developed world, an issue that will no doubt be raised at next month’s workshop.

If the relationship between inflation and economic performance is breaking down, “you can still target inflation, but it’s not really doing what you want to to stabilize the economy,” said Nick Rowe, a professor at Carleton University. “It’s not giving you a signal for your mistakes.”