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The Bank of Canada needn’t overhaul its 2% inflation target. It’s a proven success

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There are signs of strain in the Bank of Canada’s monetary-policy framework that has served Canadians so well over the past quarter-century, delivering low and stable inflation.

Apparently aware of the challenges ahead, the bank’s senior deputy governor, Carolyn Wilkins, went so far as to say in a recent speech that the bank will review all its policy options leading up to the next renewal (in 2021) of the inflation-control agreement between the federal government and the Bank of Canada. While some cracks are appearing, we would argue tweaks are all that is required.

While some cracks are appearing in the Bank of Canada’s inflation policy, only tweaks are required

The Bank of Canada has targeted inflation since 1991 and kept the target at two per cent since 1996. The inflation-targeting framework has delivered stable inflation that averaged almost exactly two per cent from 1996 until the arrival of the financial crisis and recession of 2008-09. Unfortunately, average inflation has been below target since then. Coupled with a sluggish recovery, this systematic below-target inflation suggests the framework is showing some signs of strain.

One of the major challenges for monetary policy today is that real interest........

© Financial Post