Bank of Canada governor may prefer an inflation bump to the damaging impact of higher interest rates
Which would you prefer, higher interest rates or higher inflation?
If you are someone who actually watches what the Bank of Canada does month to month, its two per cent inflation target may seem sacrosanct.
In which case, you might be surprised to hear that the concept of raising or lowering interest rates to freeze inflation at exactly two per cent is a relatively recent innovation. It was put in place in reaction to the soaring prices and wages of the 1970s and 1980s.
And the Bank of Canada has been seriously considering changing that target. Any change would still require a new agreement between the federal government and the bank. The current agreement is scheduled to end next year.
A fresh report from the business news service Bloomberg implies that the bank could surprise us with just such an announcement any time soon.
A higher inflation target means prices, from clothing to gasoline, could increase at a faster rate without fear of higher interest rates that might slow the industrial economy. (The Canadian Press)
“After shocking markets with an interest rate cut in January,” wrote Bloomberg’s Greg Quinn, “Bank of Canada Governor Stephen Poloz is considering whether to deliver another surprise: changing the central bank’s two per cent inflation target.”
‘No surprise’
Quinn does not offer the source for his latest story, but he follows the bank’s activities assiduously. The Bank of Canada, on the other hand, was quick to play down the story.
“It is absolutely wrong to characterize research done by the bank on the implications of a higher inflation target as a surprise,” said an official bank spokesperson in response to my inquiry as to whether the Bloomberg story was true.
