The Bank of Canada will need a very strong sales pitch if it decides to change its inflation target next year, according to Deputy Governor David Longworth, who helped set up the current framework in 1991. The central bank has agreed with the government to shoot for 2 percent inflation in the medium term, and adjust interest rates accordingly. That deal expires at the end of 2011.
The bank researching possible alternatives, including a lower inflation target or switching to "price-level" targeting, which would aim for a specific numeric value in the consumer price index and try to compensate for short-term deviations from that. Longworth, who retires next week after a 36-year career at the central bank, told Reuters in an interview that the bank was not favouring any one option over another.
"It isn't a slam dunk on either of those yet," he said. The current system has worked so well in anchoring Canadian's inflation expectations that some economists have criticised the very suggestion that it might be altered. Any eventual change would require a huge public education campaign, and assurances that it was going to be equally effective, said Longworth.
"Sometimes the fact that what you have is successful means that people outside will say the burden of proof is higher than it might otherwise be," Longworth said. "We've had a crisis on the financial side but not on monetary policy and so that's one of the reasons why it's too soon to say something about it. You want to be convinced that not only did you know what was better but you had a convincing story to tell about why it was."
Longworth said a communications strategy would be needed to explain the change to the public and "is one of the things that has to be weighed in the balance of whether a change should be made or not." The bank has said a lower inflation target, for example to 1 percent, is better from the point of view of economic efficiency but also poses risks.
Longworth, 57, is one of three senior Bank of Canada officials that are stepping down this year after careers there spanning three decades or more. He will be replaced by former academic Jean Boivin, who is 20 years younger and has been at the bank for less than a year.