Carney reaffirms inflation targeting

The Bank of Canada’s inflation-targeting regime has served Canadians since its adoption in 1991, and is partly responsible for the strength and relative stability we enjoy today, according to the Governor of the Bank of Canada.

“Over the past twenty years, Canadians have enjoyed a more stable and prosperous economic environment,” said Mark Carney, speaking to the Board of Trade of Metropolitan Montreal. “Even during the recent crisis, the Canadian economy proved more resilient and recovered faster than our advanced-economy peers.”

The decision to focus on inflation was renewed earlier this month. While the Bank aims for an inflation rate of about 2%, Carney said the ideal rate would be closer to zero, or even below. But targeting zero inflation would be foolhardy, he said, as it would treat the economy as if it exists in a vacuum, with no external risks.

“We make monetary policy in the real world, where shocks are a fact of life,” he said. “It is our job to anticipate potential shocks, analyze their impact on economic activity and inflation in Canada, and set monetary policy consistent with achieving the 2% inflation target over time. This ultimately remains the best contribution that monetary policy can make to the economic well-being of Canadians.”

One alternative to inflation targeting would be Price-level targeting (PLT), which he said may be considered as an unorthodox monetary policy measure, but which would be too risky to implement as the default policy of the Bank.

“As Bank research has shown… these approaches could in fact prove destabilizing to the economy and damaging to the central bank’s credibility.”

The primary goal of monetary policy must remain the stability of the financial system. The global financial crisis has amply demonstrated that financial stability is inextricably linked to economic stability.

“In some exceptional circumstances… monetary policy might itself be the appropriate tool to support financial stability,” Carney said, adding, “this last point should not be overstated. The paramount goal of monetary policy in Canada has been, and remains, price stability.”

Staff

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