Next February will mark the 20th anniversary of the decision by Ottawa and the Bank of Canada to set 2 per cent as the target rate of inflation in Canada.
Ever since, the policy of inflation targeting has simply been extended. The central bank's mandate is to set interest rates to keep inflation as close to 2 per cent as possible.
Bank of Canada Governor Mark Carney must decide by the end of next year whether to maintain that status quo. In an interview with The Globe and Mail at the G20 summit of finance ministers and central bankers, Mr. Carney said the current system has served Canada well, but he's looking at his options.
Bank officials have already rejected the idea of a higher inflation-rate target, but for several years now, the bank has been studying the merits of a new policy called price-level targeting.
Essentially, it means that if inflation comes in below or above the 2-per-cent target, bank policy should try to make up that difference in the future.
The idea has suddenly become a hot topic in the United States, where near-zero interest rates are forcing policy makers to look for new and creative ways to give the economy a boost.
"It's something we're looking at and that's no secret. We've been looking at it for the last 4½ years," Mr. Carney said. "We've done a lot of research on it. We will report on it. ... At the appropriate time, I'll do a summary of our research. I would say that inflation targeting has worked well for Canada and it is, as my colleague [deputy governor]John Murray said a few months ago, it's a pretty high bar in terms of changing that framework."
While the issue was not discussed during the G20 sessions, the concept gained attention earlier this month when Charles Evans, the president of the Federal Reserve Bank of Chicago, suggested it could be used as a way of telling markets that interest rates will remain low for a long time.
"I think this could be helpful," he said in a speech. "I think we should talk about it."
The Bank of Canada's research on price-level targeting has generally been positive. The positive aspects would be more predictability as to how prices will rise over time, because the long-term climb will not be thrown off by years with unusually low or high inflation. However the concern is that trying to make up for missed targets would lead to volatile interest rate decisions.
With a report from Reuters