The Bank of Canada’s long-standing policy of keeping inflation close to the 2% target might have been beneficial ever since its implementation in 1991, but the post-financial-crisis environment is posing an array of problems that might require some rethinking on the central bank’s part.
“Even a well-functioning monetary-policy framework deserves an open-minded discussion, particularly in the post-crisis world we live in,” senior deputy governor Carolyn Wilkins addressed the McGill University’s Max Bell School of Public Policy in Montreal earlier this week.
“There are a couple of challenges facing our framework that mean it may not serve the economic and financial welfare of Canada in the future as well as it has in the past,” Wilkins said, as quoted by The Canadian Press.
Among the bank’s key concerns is the economic vulnerability brought about by lower rates, which tend to drive Canadians and investors to take on more risk than they could actually handle. This is most apparent in the record-high debt levels that Canadian households are enduring today, Wilkins stated.
Read more: Purchasing power will be the first casualty of possible rate increases
A potential avenue worth exploring further is the bank cutting its benchmark rate “as a way to lower the costs of borrowing and stimulate economic activity.” Earlier this year, the BoC stated that it is looking at the trend-setting rate to end up anywhere between 2.5% and 3%.
Wilkins assured that the bank is currently engaged in research (in cooperation with the federal Finance Department) to determine the most appropriate framework for the challenges of this decade and the next. Among the options considered are higher inflation targets and expanding the scope to cover labor and other crucial indicators.