House considers new goals for Bank of Canada

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The House of Commons finance committee will examine whether the Bank of Canada should target "full employment" in its monetary policy, a shift that would resemble the dual mandate of the U.S. Federal Reserve.

In a unanimous vote Thursday, committee members agreed to consider possible new policy goals for the central bank ahead of the government's looming decision on whether to renew or modify the bank's current inflation target of 2 per cent.

The motion – moved by Liberal MP Scott Brison – asks the committee to look at possible alternatives to the target that has guided the central bank's work for the past 20 years, calling for at least one meeting before the end of November on whether Ottawa and the central bank "should consider other targets (such as – but not limited to – nominal GDP or full employment)."

The inflation-targeting accord must be approved jointly by Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney by the end of the year. It was last renewed for a five-year period ending Dec. 31 via a joint news release on Nov. 23, 2006. Mr. Flaherty said through a spokesman that he welcomes the hearing. The Bank of Canada had no comment.

The committee is cutting it close if it wants to have any impact on the decision by the minister and governor. The timeline in the motion suggests there is a risk that the agreement will effectively be written before the hearing takes place, although Mr. Carney is scheduled to testify at the panel on Nov. 1 to discuss his latest economic forecast. Mr. Brison said the central bank should hold off on any announcement until the committee hearing, or hearings, take place.

The Globe and Mail reported this week that the current inflation target is expected to be renewed at 2 per cent, but with new language on "flexible inflation targeting" detailing the bank's right to respond to economic shocks or dangerous buildups of credit by taking longer than usual to bring inflation to the central bank's 2-per-cent goal.

The central bank has been studying whether to shift to a system called price-level targeting, which would aim to achieve a certain level in the consumer price index over time instead of targeting an annual rate of change. Economists, though, say big changes are unlikely this time around.

Still, the renewal coincides with a growing sense that pure inflation-targeting is insufficient for the post-financial crisis economic realities. Like Fed chairman Ben Bernanke, and Mervyn King, Governor of the Bank of England, Mr. Carney has kept his key interest rate on hold in the face of hotter-than-expected inflation, judging that securing the recovery is paramount.

As far as targeting other variables, the central bank sets policy with factors such as growth, unemployment and – in recent years – the stability of the financial system in mind already. But unlike the Fed, the bank has one chief policy aim, low and stable inflation. The U.S. central bank has a dual mandate to keep prices stable and to achieve "maximum employment," generally understood to mean a jobless rate of about 5.5 per cent.

Two leading experts on Canadian monetary policy praised parliamentarians for holding a hearing, but suggested that adding targets would not be most promising avenue for improvement.

"There's more legitimate things we should be discussing," said Michael Gregory, senior economist at BMO Nesbitt Burns, such as whether the central bank's mandate should be tweaked to formally add stability of the financial system as a policy goal. "Would a commitment to financial stability have caused the Bank of Canada to act differently through this crisis? Maybe.''

NDP MP Peggy Nash, the Opposition's finance critic, said an employment target "shifts the mind a bit" and is worthy of discussion.

Chris Ragan, a McGill University professor who has served as an adviser at the Bank of Canada and a visiting economist at the Finance Department, said the reason most central banks focus the bulk of their energy on inflation is because they have much more direct control over it than something like "full" employment.

Prof. Ragan also questioned whether writing added flexibility into the inflation-targeting mandate would be wise in the long run, since this might make it harder to manage expectations.

"I think the status quo works pretty well," he said. "We've got a flexible inflation-targeting system, even without the word flexible in there formally, it's a flexible system."