Harper Favors Bank of Canada 2% Inflation Target
Canadian Prime Minister Stephen Harper said he favors keeping the Bank of Canada's inflation target at 2 percent when the current agreement with the government expires.
The comments by Harper, who's seeking re-election on Oct. 14, were his first on the issue. The central bank is almost halfway through a five-year agreement with the government on inflation targeting, so the next government may decide whether to renew, change or cancel the goal. The Bank of Canada now sets interest rates to keep the inflation rate at 2 percent, with a tolerance range of between 1 percent and 3 percent.
“I see no reason why we shouldn't continue with the general inflation targets that we've had for the last several years,'' Harper, 49, told reporters over a breakfast meeting today in Toronto.
Harper's comment comes as Governor Mark Carney oversees research at the central bank into whether setting a different target would benefit Canadians. The current goal means the average cost of living doubles every 35 years. Former Governor John Crow and researchers at the non-partisan C.D. Howe Institute have called for a stricter target.
“Given our relative performance vis-?-vis most other countries, I'd have to say if it ain't broke, don't fix it,'' said John Clinkard, economist at Deutsche Bank in Toronto.
Target History
Canada first set an inflation target in 1991, the second country after New Zealand to do so. Inflation has averaged 1.9 percent in Canada since 1991, and today's pace of 3.4 percent is slower than in the U.S., where it's 5.6 percent.
Carney said in a June 27 speech that he's mulling whether central banks should have more discretion on how fast to bring inflation back to the target in response to different types of economic shocks or an asset bubble fast cash now faxless payday advance.
The bank's research ahead of 2011 focuses in part on whether to adopt a “price-level'' target, which would require policy makers to compensate for periods where the target was missed rather than just keeping inflation at a certain pace.
Harper said a target that's too strict would be “unwise,'' because it might lead to the risk of deflation. Canada's inflation “is really contained'' and, while it's outside the bank's upper limit now, “we're going to by and large be able to manage this within target,'' he said.
Stephane Dion, head of the main opposition Liberal Party, told reporters today, “in my opinion, 1 to 3 percent is very good,'' referring to the inflation target. He spoke during a campaign stop in Walkerton, Ontario.
Economic Growth
The Bank of Canada can influence economic growth and inflation by changing the target interest rate for overnight loans between commercial banks. The overnight target influences the prime rate that commercial banks charge their best customers and also affects demand for Canadian exports if rate changes move the country's currency.
Canada could consider lowering the inflation target to 1.5 percent, for instance, said Dale Orr, managing director of Canadian economic research in Toronto for Global Insight.
“Since it comes up for renewal it's always an opportunity to see if another way is better,'' Orr said, adding that it is unlikely Harper would try to steer the bank's research in a certain direction.