Canada’s aging population may lessen the impact of the Bank of Canada’s inflation-targeting policies and require interest rates to rise.
That’s according to a report from the C.D. Howe Institute which shows that the impact of monetary policy is limited by a larger share of older adults.
In “Faulty Transmissions: How Demographics Affect Monetary Policy in Canada” authors Steve Ambler and Jeremy Kronick highlight that over the past decade inflation has averaged 1.5%, missing the BoC’s 2% target.
“Canada’s aging population is likely a leading cause of the systematic undershooting of inflation we have seen since the financial crisis,” says Ambler. “Specifically, an aging population that takes on less debt is less sensitive to changes in the interest rate.”
Increased consumer spending usually results from lower interest rates due to the lower cost of credit, but the report notes that if there are more older adults, with less credit, this is lessened as are the effects of rising rates.
“Credit plays an important role on the real economy – it magnifies the reduction in the effectiveness of monetary policy that comes from an aging population,” Kronick explains. “Because of population aging, lower interest rates have not generated the typical increase in spending, leading to subdued inflation and lower economic growth.”
The authors conclude that if inflation-targeting measures are less effective, it may be necessary for the BoC to increase interest rates more significantly and to consider less conventional monetary policy.