By Canadian Press

Higher interest rate target? Expanded mandate? Bank of Canada explores options

Nov 20, 2018 | 12:33 PM

OTTAWA — The Bank of Canada is studying whether it should make changes to the framework that has underpinned its policy decisions — such as interest-rate movements — for several decades.

In a speech Tuesday, senior deputy governor Carolyn Wilkins said the current inflation-targeting approach has improved the economic and financial well-being of Canadians since it was established in 1991.

But after a decade in the post-financial-crisis environment, she said it has become clear there are also down sides to the bank’s mandate of helping inflation stay close to its target of two per cent.

“Even a well-functioning monetary-policy framework deserves an open-minded discussion, particularly in the post-crisis world we live in,” Wilkins said in her address to McGill University’s Max Bell School of Public Policy in Montreal.

“There are a couple of challenges facing our framework that mean it may not serve the economic and financial welfare of Canada in the future as well as it has in the past.” 

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One key issue, she noted, is that interest rates are no longer expected to rise as high as they had been before the crisis, which means there will be less room — or “conventional firepower” — for the bank to cut rates in an economic downturn. The bank can cut its trend-setting rate as a way to lower the costs of borrowing and stimulate economic activity.

The bank, which has been on a rate-hiking path thanks to the stronger economy, has said it expects its benchmark rate to eventually settle somewhere between 2.5 and 3.5 per cent, about two percentage points lower than where it was in the early 2000s.

Another concern about the current framework, Wilkins said, is that lower rates may entice Canadians and investors to take on excessive risk — leaving the economy exposed to the ups and downs of financial cycles. Long-running low-rate conditions have encouraged Canadian households to amass record levels of debt.

She said the Bank of Canada is conducting research on alternative frameworks, including a higher target for inflation and a more flexible, dual mandate that would extend the bank’s focus to also incorporate labour and other economic indicators.

The work, which is an effort with the federal Finance Department, is underway in the lead-up to the Bank of Canada’s next five-year renewal of its inflation-control agreement with the government. The next renewal is set for 2021.

The bank will also look at how it can strengthen the options at its disposal when it comes to “unconventional” monetary policy tools, she said. During a crisis, if necessary, the Bank of Canada can provide explicit guidance for the markets ahead of rate decisions, introduce negative interest rates and launch programs such as quantitative easing.

Andy Blatchford, The Canadian Press