The Bank focuses on keeping inflation low, stable and predictable in order to encourage long-term investments for citizens to contribute to lasting economic growth, the creation of jobs and increased productivity – which will ultimately improve standard of living. This strategy is encompassed by the inflation control target that was adopted by the Bank of Canada in 1991, which sets a control range of 1-3 percent, ideally with a 2 percent midpoint.
And, looking at historical statistics since its inception, the Bank has been able to maintain this control effectively. For example, inflation rate for 1Q 2013 was 1. 3%. According to the Bank, this monetary policy is implemented by influencing short-term interest rates which is done by raising or lowering the target for the overnight rate. In the end, a reduction in the policy rate, or easing of monetary policy, can be expected to boost total demand for Canadian goods and services, and vice versa.
In addition to this, another goal for the Bank is maintaining flexible exchange rates – which they consider best suited for achieving their inflation target. The floating Canadian dollar provides an exchange rate buffer which allows the economy to absorb and adjust to economic shocks it may encounter. Though additional factors like exchange rates and unemployment seem to be important to policy makers, they are not focused on as intently as inflation and little information is available in regard to them.
Their thinking is that monetary policy cannot have a systematic and sustained effect on any other variable, thus making it senseless to adopt any other long-term targets. It seems apparent that the Canadian policy strives to remain “forward looking” in a sense. The Bank places much of its emphasis on long-lasting shocks to the economy, rather than those believed to be short lived. By attempting to keep inflation close to their target, they consider themselves better able to respond to changes in the economic environment in such a way to avoid situations of excess demand or upply. Thus, pressures of inflation rising or falling are kept to a minimum. There’s much argument surrounding whether or not Canada’s policy is really that good or if they have just been lucky over the years. Volatility has increased in the Canadian economy over the years, however, they believe that their “exceptional” economic performance was the result of an even greater improvement in monetary policy and the policy offset the volatile environment, resulting in greater macroeconomic performance.
It’s especially important to the Bank to remain credible to the Canadian people by being open and clear about their policy choices. They feel that this credibility keeps expectations to preserve future inflation close to the target and this “anchors” them to ensure that it happens. Even though Canada’s approach to communicating its monetary policy is much different than that of the United States, one could argue that they may be ‘putting blinders’ on their citizens, to avoid poor performance in other areas.
Is their layman, tunnel vision approach regarding inflation control diverting the public from questioning whether or not it the best framework to utilize to drive the economy in a positive direction? The Canadian economy is still struggling to recover from the Great Recession and is trying to find ways in order to avoid the zero lower bound issue, but they put little importance communicating on how they are going to do so with the public.