RPT-UPDATE 2-Bank of Canada updates inflation target thinking

(Repeats story from Tuesday without changes)

* New inflation or price-level targets still options

* BoC to study its role in securing financial stability

* Must be cautious, price stability will not be sacrificed

By Ka Yan Ng

KINGSTON, Ontario, Aug 24 (Reuters) - Altering the Bank of Canada's inflation target and broadening its mandate to help prevent financial crises would help the economy, but be hard to implement, a senior central bank official said on Tuesday.

In a speech that took an in-depth look at options to replace or amend the central bank's 2 percent inflation target, Deputy Governor John Murray highlighted risks and advantages of the current system, of a lower inflation target and of alternatives like targeting prices rather than inflation.

"Shifting to a lower inflation target and/or moving to a price-level target are still possibilities, and in some respects look even more promising than they did before the crisis, although other aspects of our research results and recent experience lend an extra air of caution," Murray told the Canadian Association for Business Economics.

The 2 percent inflation target is up for renewal at the end of next year, and the bank has been researching alternatives since 2006.

Murray said the debate on possible changes is purely academic at this stage and more work is needed before deciding whether to put them into practice, especially since the current regime has worked so well.

He said central bankers were also examining if -- in light of the global financial crisis -- monetary policy should lean against so-called asset bubbles before they disrupt financial stability, or limit itself to mopping up after a crisis.

"Should the inflation-targeting agreement itself, or the central bank's reaction function, give explicit recognition to asset prices and credit growth. If so, what form would it take?" he asked.

Some economists argue that the Federal Reserve, for example, could have prevented, or at least softened, the financial meltdown if it had acted decisively to cool the U.S. housing market before it crashed.

STATUS QUO

But such bold policy changes would not come easily and Murray made clear the Bank of Canada would tread carefully and would not sacrifice price stability.

"We judge that the odds still favor the status quo next year, along with a more focused research agenda for possible changes by 2016," Michael Gregory, senior economist at BMO Capital Markets, said in a note.

Scotia Capital economists Derek Holt and Gorica Djeric were similar sanguine. "All policy options remain on the table, but the Bank of Canada is signaling a lack of conviction regarding the merits of altering its current focus," they wrote.

Murray said the bank's research has shown that lowering its inflation target would improve economic welfare. But the magnitude of the benefit is unclear.

Price-level targeting differs from inflation targeting in that any deviation from a specific target for the consumer price index must be corrected. If prices overshoot in one period, they must undershoot later, whereas under inflation targeting "bygones are bygones."

If changes were made, "I'd put a lot of emphasis on the communication and transition to avoid surprises," Murray said.

Murray made no reference to the bank's Sept. 8 interest rate decision, but noted that wage growth -- closely watched for the bank for signs inflation is heating up -- has begun to slow even as more jobs are created.

"So you've got these competing forces right now even, as you note, the output gap is beginning to shrink," he said.

The Bank of Canada raised interest rates twice this year as the economy emerges from recession. Economists still expect a further rate hike next month, but weak domestic and global economic data mean that's a less certain bet than before. (Writing by Louise Egan; editing by Janet Guttsman)