The Bank of Canada’s monetary policy will be scrutinised in the coming years ahead of a periodic deal with the federal government.

The central bank’s inflation-control agreement with the government is renewed every five years and the next renewal is in 2022. Before then the BoC will consider alternative monetary policy frameworks.

Speaking Tuesday at McGill University’s Max Bell School of Public Policy, the bank’s senior deputy governor Carolyn Wilkins said what has been done in recent years has been successful, but that doesn’t mean it should be the only option.

“There is no doubt that our inflation-targeting framework has promoted the economic and financial well-being of Canadians,” said Senior Deputy Governor Wilkins. “A decade of experience in the post-crisis world, though, shows us it is not perfect. It is time to conduct a thorough review of the alternatives.”

The review will consider two key points: the lower-than-normal estimate of the nominal neutral rate of interest rates, which reduces the bank’s ability to react to a downturn; and how the low rate environment may be fuelling households and investors to take excessive risks which exposes the financial system to boom-bust cycles.

“We need to keep it simple: focus on clear objectives that monetary policy can actually achieve, and assess how it affects people,” Wilkins said. “We will need to improve our methods to account for considerations such as distributional effects and financial stability. We also must ensure that the right supporting policy tools and measures are available in extraordinary circumstances.”

 

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