Bank of Canada sticks with 2% inflation target for 5 more years

The Bank of Canada and the Department of Finance have agreed to stick to the bank's inflation targeting strategy for five more years.

Central bank to continue to target inflation between 1 and 3 per cent until 2021 at least

The Bank of Canada has targeted inflation in a range between 1 and 3 per cent since the early 1990s. (Chris Wattie/Reuters)

The Bank of Canada and the Department of Finance have agreed to stick to the bank's inflation targeting strategy for five more years.

In a release Monday, the Department of Finance said the central bank, which has had a policy of inflation targeting for the past 25 years, will keep doing so in its monetary policy decisions for at least the next five.

"Under this renewed agreement, the inflation target will continue to be the 2 per cent mid-point of the 1 to 3 per cent inflation-control range," the statement said.

The policy will be in effect until the end of 2021 at least.

"The framework's track record is impressive," Bank of Canada governor Stephen Poloz told members of Parliament during an appearance Monday before the House of Commons finance committee.

"Annual inflation has averaged almost exactly two per cent since 1991," he said. "Inflation has also been more stable, which has meant that unemployment and interest rates have become lower and more stable."

Not all central banks target inflation. Over the years, many countries have chosen to set monetary policy with a goal of influencing other factors — including the employment rate, or the value of the currency — with varying degrees of success.

But since about 1990, most developed economies have targeted inflation instead, on the theory that a slow and gradual increase in the cost of living would have the most desirable impact on the economy and standard of living.

TD Bank welcomed the news in a note Monday, arguing that "renewing the target in its existing form is the most appealing of the alternatives," while taking note that the central bank won't be calculating inflation in quite the same way that it historically has.

New way of finding core rate

Rather than basing its decision on so-called "core" inflation (which strips out volatile items such as food and energy), the Bank of Canada will now look at three new metrics: CPI-common, CPI-trim, and CPI-median.

"CPI-common is a measure of inflation that uses statistics to extract common price changes across categories," TD Bank economist Brian DePratto said. "CPI-trim is a 'trimmed-mean' measure, which calculates the mean inflation rate once extreme outliers (i.e. series with unusually large movements in a given month) are removed from the sample."

And  "CPI-median captures the median price change in terms of CPI sub-component weights," DePratto said.


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