Bank of Canada Governor Stephen Poloz disliked the question.
About midway through our interview at Jackson Hole, Wyo., I noted that Fed chair Janet Yellen has made clear recently that the U.S. recovery's history of false starts has made her inclined to err on the side of growth; that is, hold off on raising interest rates so long as inflation remains in check. Given the Bank of Canada's "serial disappointment" with global economic growth, I wondered if Mr. Poloz was similarly inclined.
"That's a roundabout way of saying the Fed chair is dovish, and I am the same? Is that really what you're trying to ask me?"
To be honest, I hadn't thought of it that way at all. (To be so clever!) I merely was seeking insight into how strictly Mr. Poloz would adhere to the Bank of Canada's inflation target. The central bank says the current breach of the 2-per-cent target is temporary because underlying economic growth is too weak to support sustained upward pressure on prices. But there will come a point when that assessment will be more difficult to make. Fortunately, Mr. Poloz set aside his feeling of entrapment and preceded to answer my question. The response was illuminating. Mr. Poloz is preparing to fight demons.
"My interpretation of all of this is we all kind of grew up thinking inflation is the demon," he said. "There was always this asymmetric view of inflation, I think: It's a slippery slope if inflation starts to creep up and all that stuff. What the experience of the the last five years has taught us, I think, is it really is a symmetric problem: Too much or too little have their own dangers. I do think we didn't put much weight on the underside back in the day when we were first developing" inflation targets, he said.
Mr. Poloz was a senior researcher at the Bank of Canada in the 1990s and he was deeply involved in the decision to use inflation to guide interest rates. He remains a true believer. His intimate knowledge of what policy makers were setting out to do when they adopted an inflation target now is informing his analysis of how long the central bank can wait before raising borrowing costs.
Canada's inflation target almost always is described as an annual rate of 2 per cent. That's because it's easier to type or say "2 per cent" than it is to type or say "the midpoint of a target band of 1 per cent to 3 per cent." That shorthand simplifies communication, but a couple of decades of repetition may have created the false impression of a ceiling for price increases in Canada before the bank moves on rates. The European Central Bank aims to keep annual price increases "at or below" 2 per cent. We forget that the Canadian central bank's restraints are far looser.
"It is a range for a reason," Mr. Poloz said. "All the things you are asking me about, you just don't know them. So you are taking your best judgment and aim at it and if you are a little off either way it's okay, as long as it's a little. Whereas the strict interpretation of the thing as a ceiling means you've got to keep aiming low because there's a chance it could go above where I'm aiming."
Now we're back at my original question: Is the Bank of Canada inclined to err on the side of growth or inflation? My query was unconsciously rooted in the notion that the 2-per-cent target is like a carnival game where the only way to win is to hit the bull's eye. Mr. Poloz's interpretation of his mandate is more flexible. He's aiming directly at 2 per cent and is unafraid if his shot goes a little high or a little low. In effect, that means he will err on the side of growth, which is entirely appropriate given Canada's weak export performance.
"Right now, inflation, at most, is at the middle of that target zone and is probably going to drift lower unless we get that rotation [from household spending to exports and business investment] and all of those things that we've talked about," Mr. Poloz said. "As a simple interpretation, yeah, we're more pro-growth than anti-inflation in that situation."