Canada Dynamic concept Monetary policy

Inflation controls by the Bank of Canada

The Bank of Canada renewed its inflation control strategy by five years to 2021 last week. Canada is one of the first countries adopted inflation control through the central banks. In 1991, the Bank of Canada started an inflation-targeting framework to guide its monetary policy. The framework is to control annual inflation rate to near 2%, with a range between 1% to 3%.

Experience has indicated that the strategy is sound. Since 1991, the Consumer Price Index (CPI) inflation in Canada has been maintained at a level of close to 2% with lower variation compared with prior to 1991.

Other countries have similar inflation control strategies, but I think the Bank of Canada seems to have a better one.

The U. S. Federal Reserve aims to inflation target of 2% with no explicit range allowed. This requires more frequent monetary responses even if the inflation rate has some minor deviations from the target. In today’s environment, some of Fed members are actually hoping to allow the inflation to overshoot the target and so allow a slower monetary normalization to stimulate the economy (the so called high-pressure economy concept). However they are facing challenges due to the lack of the flexibility in inflation target would otherwise available if the range in inflation target had been applied.

The Bank of Japan had the target of annual inflation of 1%. The set point is too low often some small drifting could cause deflation scenario. Inflation pushes consumers’ spending, so it is a kind of driving force for economic growths, and a 1% of inflation target seems less forceful. The Bank of Japan has recognized the disadvantage and has been moving toward a higher inflation target although it is still busy fighting against deflation.

The European Central Bank has inflation target 1% or less. While it might fit for the slow growth mode over the area, it is a risk strategy from control perspective. The inflation target is too close to zero bound and no wonder their monetary policies have to go to negative interest territory these days.

In summary, I think the Bank of Canada made a smart move to renew its inflation target for another five years.