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

Higher interest rate target? Expanded mandate? Bank of Canada explores options
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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 changes — for nearly four decades.

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

But Wilkins says after a decade in the post-financial-crisis world it has become clear the bank’s mandate of helping inflation stay close to its target of two per cent has its down sides.

She says one key challenge is that interest rates are no longer expected to rise as high they had before the crisis and that means there will be less room for the bank to cut rates in an economic downturn.

In addition, Wilkins says lower rates may entice Canadians and investors to take on excessive risk — leaving the economy exposed to the ups and downs of financial cycles.

She says the bank 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 a joint 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 Canadian Press

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