A senior Bank of Canada official rejects an idea floated by the International Monetary Fund that would see policy makers in major economies setting interest rates with the aim of reaching a higher level of inflation.
Canada's central bank seeks to keep annual inflation at about 2 per cent, and outgoing senior deputy governor Paul Jenkins, who retires April 7, said yesterday that he would not favour raising that target.
It was the first public reaction by a Bank of Canada official to a February report by top economists at the Washington-based IMF, which argued that a 4-per-cent target would make it easier for policy makers around the world to react to shocks like the recent financial crisis, or even a flu pandemic or terrorist attack.
Mr. Jenkins, however, implicitly aligned himself with officials from the European Central Bank, which has flatly rejected the IMF proposal, and U.S. Federal Reserve Board chairman Ben Bernanke, who has said the idea carries a risk that the inflation target might keep rising once the genie is out of the bottle.
"I would not see the benefits of raising a target rate of inflation," Mr. Jenkins said in an interview. "One of the issues when you start thinking in those terms is, if 4 per cent, why not 5? Why not 6? I mean, where do you stop?"
According to IMF economists, higher inflation and borrowing costs at the outset of a crisis would allow central banks to slash interest rates more aggressively and keep them at lower levels longer if needed to encourage spending.
The problem, Mr. Jenkins said, is that raising the target would fly in the face of the notion that central banks have targets in the first place so consumers and businesses have confidence they can rely on the cost of key items not spinning out of control, and plan accordingly.
"To anchor those expectations, you have to have a target that's credible and is actually seen as delivering price stability, or close to price stability," he said. "As you move further away from that, that credibility, in my view, would be lost."
The need to anchor expectations throughout the economy also illustrates the drawback of an untested technique the bank has been studying called price-level targeting, which would attempt to make up for periods when the inflation target is missed by aiming for a specified increase in inflation over a period of time.