Central bank sticks with 2% inflation target

Canada’s monetary policy-makers will continue to focus on a two-percent inflation target — but how they determine the overall direction and pace of price movements is about to change.

The federal government and the Bank of Canada said Monday they had renewed their inflation mandate for another five years. In doing so, however, they decided to stop using the so-called “core” reading of Consumer Price Index as their primary guide. Under the renewed agreement, which will run until the end of 2021, the target will remain at the mid-point of the central bank’s comfort range of one to three per cent.

“Maintaining low, stable and predictable inflation is essential to foster an environment in which middle class Canadians can prosper. Price stability contributes to balanced, sustainable and inclusive economic growth,” the finance department said in a statement.

In a separate statement, Finance Minister Bill Morneau said “Canada has a tried-and-true inflationtargeting regime, which was brought in 25 years ago.”

“Controlling the pace of inflation at a steady and low level protects the purchasing power of all Canadians and helps sustain growth and job creation,” Morneau added. Canada’s inflation-targeting policy was adopted in 1991, and is similar to those used by many other major industrialized nations.

The bank uses its key interest rate to nudge the consumer price index toward the two-per-cent inflation target, although policymakers view the one-to-three-per-cent range of price rises as still being within their comfort zone.

Since 2001, the bank’s core inflation indicator has been the so-called “CPIX” reading. It strips out many of the economy’s most volatile items, such as some food, energy products and mortgage interest costs.

Beginning with November’s data, to be published by Statistics Canada on Dec. 22, inflation reports will no longer refer to the core indicator. In its place will be three separate indexes: CPI-common (tracking price changes across common categories), CPImedian (the range of price changes in a given month) and CPI-trim (excluding components with extreme monthly price changes).

On Friday, Statistics Canada reported overall CPI in September rose 1.3 per cent on a year-over-year basis, up from 1.1 per cent the previous month. Core inflation during September was 1.8 per cent, unchanged from August.

“The Bank of Canada and the government have chosen a fairly conservative path forward,” said Brian DePratto, at TD Economics, in a note to investors.

“Renewing the target in its existing form is the most appealing of the alternatives, particularly given both the current fragility of the Canadian economy,” he said. “Moreover, given the success of the current mandate to date, the bar to change was undoubtedly set very high.”