Carney defends inflation-targeting policy
Bank of Canada governor says it’s ‘disciplined, flexible’
The head of the Bank of Canada on Friday defended the monetary policy in what he called a “messy world,” saying setting flexible inflation targets provides “a robust framework for all seasons.”
“In today’s reality, the hurdles are significant,” Mark Carney said in a speech to the U.S. Monetary Policy Forum in New York.
Carney said the sustained and necessary structural reforms in Europe “may, for a time, actually depress nominal growth” and the “repair of U.S. household balance sheets has yet to fully run its course,” while Japan’s “adjustment” remains a work in progress.
“It is not surprising that in the wake of these challenges, monetary policy frameworks are under intense scrutiny,” he said.
“Is there a simple answer in such a messy world? It might not surprise you that as the governor of a central bank that helped pioneer inflation targeting, I will argue ... that flexible inflation targeting remains the best response,” providing a “robust framework for all seasons.”
Carney said “in a complex and continuously evolving world that no one can predict with certainty, policy-makers need a robust framework – one that remains appropriate no matter the circumstances.”
He added: “This is not a lazy reflex. ... Inflation targeting is disciplined but flexible.
“It allows central banks to deliver what is expected, while dealing with the unexpected.”
The Bank of Canada has left its key interest rate at a near-record low of one per cent since September 2010, which Carney said Friday is “a degree of stimulus appropriate to an environment where the canadian economy faces considerable external headwinds.”
The bank maintains an inflation target of two per cent, the midway point of its range of one-to-three per cent. Referring to the bank’s most recent monetary policy report, Carney said “this accommodative policy stance – with a gradual reduction in monetary stimulus over the projection horizon – would be consistent with returning inflation to the two per cent total CPI inflation target in seven quarters.”
“The post-crisis world presents economists, academics and policy-makers with many challenges.
Chief among them is the conduct of monetary policy during a period of profound adjustment during which deflation, inflation and financial stability risks could all threaten,” he said.
Carney was speaking as he prepared to join other G20 central bankers in Mexico City for a weekend meeting that will be dominated by the debt crisis in the eurozone.
Finance Minister Jim Flaherty will also be there, along with his global counterparts, as policy-makers look to con- tain the crisis in Europe after the region approved a 130-billion euro ($170-billion Cdn) bailout package for debtplagued Greece.
In his New York speech, Carney said the “most palatable strategy to reduce debt is to increase growth.”
But he added “the advanced economies could face a prolonged period of deficient demand and weak nominal growth. ... The clock is ticking.
“The longer that crisis economies and their job markets remain moribund, the greater the risk of failure.”