"The case … is not clearer." BoC's inflation targeting policy meets resistance


There are about three million Canadians working today who have no idea how real inflation is.

Since the mid-1990s, the Consumer Price Index has remained fairly close to the Bank of Canada's roughly two percent target. This was true in October, when the CPI was 2.4% higher than a year earlier, Statistics Canada reported on November 23. "Central" measures that policymakers designed to remove rougher components from StatCan's price basket were even closer to the target, suggesting that the central bank will continue with its plan to raise interest rates as fast as economic conditions permit.

The newest members of the Canadian workforce – ages 15-24 – may be wondering about the reason for the unrest. His parents and grandparents could tell stories about how miserable life could be before heroes like Paul Volcker, the former head of the US Federal Reserve, and Gordon Thiessen, the Canadian central banker who introduced the current price-targeting scheme, killed inflation dragons.

But his own experience with central banks was probably negative. The only price increases they have experienced are those deliberately caused by Stephen Poloz, the current governor of the Bank of Canada, and their representatives on the Board of Governors: StatCan's mortgage interest cost measure rose 7 percent in October from one year compared to an annual gain of 3.8% in May.

For some of these children, Poloz is denying them a home. And for what? An economic indicator that never moves. The central bank is facing a credibility test and knows this.

"When you're in the '70s and' 80s, and you see inflation, and that's a dragon to kill, then everyone does not like that, but they're after you when you raise interest rates to achieve it," he said. Carolyn Wilkins, the senior vice governor, said at an event hosted by the Max Bell School of Public Policy at McGill University on November 20. "Once you're there, it seems like something really silly to follow," she continued. "If you do your job well, people think:" Why are you raising interest rates? There is no inflation. "That's because you do your job well."

After a decade of extraordinary displays of financial alchemy, the central bankers are ready for things to return to normal. The Fed is leading the way, having raised interest rates eight times since the end of 2015. The Bank of Canada is a few steps back with five increases since July 2017. Dana Peterson, an economist at Citibank in New York, thinks that Poloz and his lieutenants will leave the benchmark rate unchanged at their last monetary policy meeting in December 2008, raising it by 2 percentage points to 2 percent in January. That would still be low by historical standards, but it would be the biggest since before the Financial Crisis. The story means little if you've built a life around borrowing money for almost nothing.

If you do your job well, people think: "Why are you raising interest rates?" There is no inflation. "That's because you do your job well

Carolyn Wilkins, Deputy Governor of Bank of Canada

That is one reason why the shift from central banks to normality is encountering some resistance. Greg Ip, a columnist for the Wall Street Journal, recently has written about "QE babies" the cohort of traders who have never worked in markets that were not being squeezed by the Fed's bond buying policy known as quantitative easing. These Master Beginners of the Universe are therefore trembling at the site of high interest rates.

At the same time, the adoption of inflation targets by central banks is being postponed by some of the older ones who were around when this happened. Volcker, who left the Fed in 1987, I wrote In a comment to Bloomberg News on October 24, he did not know of any "theoretical justification" to base monetary policy on achieving 2% inflation. Diane Bellemare, a senator from Quebec, I asked Poloz and Wilkins on Oct. 31 thought that the central bank should also target jobs. David Romer, a renowned economist at the University of California at Berkeley, reported in Ottawa on Nov. 1 that the initial results of one of his current research efforts suggest that policy makers could achieve better results for economic predictions.

"Defending the inflation target is not clearer," Romer told a conference hosted by the Bank of Canada. Instead of simply defending their current regimes, central banks should have the courage to prove that there is no better way to determine where to set interest rates, Romer said at the head of most of the leaders of the central bank.

Canada was one of the first to adopt inflation targets after years of thorough study by the top central bank economists, including a young researcher named Stephen Poloz. His response to the inquisition of a policy he helped to create? The most ambitious review of Canadian monetary the current regime was implemented in 1992.

The Finance Department renews the mandate of the Bank of Canada every five years; the upcoming renovation planned for 2021. Wilkins said At McGill, the central bank would use that time to conduct a "horse race" between targeting inflation and several competitors, including a dual mandate that would put jobs on an equal footing with inflation. Officials will be part of the horse they know, but Wilkins insisted they are open to being persuaded that there could be a better way.

Meanwhile, the central bank faces a more immediate challenge: to teach a new generation that uncontrolled inflation is more than a fairy tale. "We'll have to find different ways to explain it," Wilkins said.

• E-mail: kcarmichael@Postmedia.com | Twitter: CarmichaelKevin


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