Flaherty Says Bank of Canada Mandate to Remain Unchanged

Canadian Finance Minister Jim Flaherty said the Bank of Canada’s mandate will remain unchanged, as the government prepares its five-year renewal of the central bank’s inflation target by the end of this year.

Flaherty, speaking yesterday to reporters in Trenton, Ontario, said the government will once again announce the range in which the central bank seeks to keep inflation, once it completes its review. Bank of Canada Governor Mark Carney told lawmakers today the mandate has “proven its worth.”

“We will announce the range, of course, as we do,” Flaherty said. “Other than that, the mandate remains the same for the Bank of Canada.”

Canada led the Group of Seven nations by adopting an inflation rate target in 1991, a policy now used by about two dozen central banks, including the Bank of England and the European Central Bank. Since then, Canadian inflation has averaged 2 percent, compared with an average of 6.9 percent during the previous 15 years, according to data compiled by Bloomberg. The mandate has been renewed four times since 1991.

At the last renewal, in November 2006, the central bank and finance department agreed the target would remain the 2 percent midpoint of a 1 percent to 3 percent range.

Potential Changes

Since then, the central bank has been studying whether to make changes to the current system, such as targeting the level of the consumer-price index instead of its growth, lowering the inflation target and using policy to counter asset-price bubbles.

The bank’s mandate may be tweaked to let it return inflation to target more slowly when there are risks to the financial system, the Globe and Mail newspaper reported Oct. 17.

Carney said today the Bank of Canada is already practicing what he called “flexible” targeting.

“That’s part of our core job,” Carney told lawmakers today in Ottawa. “There is some variability in that time horizon depending on the scale and nature and persistence of various shocks which could be related to household debt, could be related to Europe, could be related to the United States, both positive and negative.”

Carney’s comment “maybe reflects a decision that they don’t need a formal ‘preamble’ to the mandate renewal,” said Mark Chandler, head of Canada fixed-income strategy at RBC Capital Markets in Toronto, referring to the idea of adding language to the agreement that would give the bank more flexibility.

Committee Study

The House of Commons Finance Committee is also studying whether the central bank’s monetary policy mandate should be broadened to include other targets, such as full employment or output. The hearing today wasn’t related to that study.

Canada’s experience with the 2 percent target has been that it is the “best contribution” monetary policy can make to keeping unemployment low, Carney said.

Seven of 11 economists surveyed by Bloomberg from Sept. 22 to Sept. 29 said the bank’s goal will not change.

“What they should be doing is, they should be doing more of the same,” said Chris Ragan, a former adviser to the central bank and McGill University economics professor, adding the new central bank agreement will probably include language on promoting financial stability.

“It’s obviously appropriate for the Bank of Canada to be thinking about financial stability,” Ragan said.

Carney today also said there is a role for the Bank of Canada to play to tackle financial stability issues if the problem becomes broad-based within the economy, though any such move would need to be “well-explained.”

Carney said regulations at the “micro” level, through the country’s banking regulator, and “macro” measures by the government should be considered to help promote financial stability, if the issue isn’t “generalized” in the economy. Monetary policy should be considered after such regulations have been used, he said.

To contact the reporters on this story: Colin McClelland in Trenton, Ontario at cmcclelland1@bloomberg.net, Theophilos Argitis in Ottawa at targitis@bloomberg.net.

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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