Bank of Canada urged to lower inflation target
* C.D. Howe Institute urges cut to 1.5 pct target rate
* Says BoC policy should consider the credit cycle
OTTAWA Jan 27 (Reuters) - The Bank of Canada should lower its inflation target to 1.5 percent from 2 percent when it renews its agreement with the government at the end of this year, an independent research group said on Thursday.
The C.D. Howe Institute said in a research paper that the central bank's target should be further lowered to 1 percent at the subsequent renewal five years later.
The paper's author, University of Toronto economist Angelo Melino, said research by the central bank has shown that a lower inflation target would improve Canadian's welfare, but that there is reluctance to change the 2 percent target because it has worked so well.
"Events are now forcing our hand by ruling out the status quo," he wrote.
"Welcome improvements by Statistics Canada to the calculation of the CPI mean that aiming at a measure of 2 percent inflation over the next few years would amount to accepting a stealth increase in the true rate of inflation."
In preparation for the renewal of its five-year framework, agreement the central bank has been mulling the options of either lowering the inflation target or switching to price-level targeting, which differs from the current regime by compensating for past deviations from the target.
The bank is also considering whether monetary policy should be used to prevent financial bubbles from forming, a burning central bank concern after the experience of the U.S. housing collapse and subsequent global financial crisis.
Melino said the bank should closely watch for the formation of asset bubbles and consider these developments when setting interest rates. It should at times be flexible with the inflation or price target and "use its policy rate to help moderate the credit cycle."
He also recommended the bank switch to price-level targeting on a temporary basis if it is ever obliged to cut interest rates to near zero again, as it did at the height of the global financial crisis. (Reporting by Louise Egan; editing by Rob Wilson)
- Tweet this
- Link this
- Share this
- Digg this
- Reprints
2% inflation seems to work, but more importantly is the amount of Money Supply in the grass roots economy.
–
If people bank too much money or the Interest rate is to high the money funnels out of the economy.
–
Sometimes the housing market heats up like now, when we are short in the money supply and the BOC is put in a situation of raising rates to cool a housing market when the Interest rate should be lower to fuel the rest of the economy.
–
I suggested to the BOC and Flaherty that they strike a new deal where the HST has 2% dedicated to the BOC’s management. What I mean is, the money would still got to Gov’t Debt, but the rate would be determined by the BOC lets say 3 times a year.
–
The National Debt could be paid off this way And the Interest rate could be kept lower.
–
When Infation hits, (people spending more times in the cycle in a month or interest rates are too low for too long, Or too many people take out mortgages, putting in large amounts of money into the economy etc.) when this inflation hits and this money is filtering into the economy the Bank of canada can act quicker by using a HST hike rather than an interest hike only affecting future investments and open mortgages.
–
IF the HST jumped and it wasn’t the typical “tax and spend” from the Gov’t but rather a “Tax and pay down Debt” the money wouldn’t cycle back into the economy.
–
IF the Hot market got even hotter, the Interest rates could be raised too.
–
The next issue.
There should be a program to shift mortgages so that the same number come due each year to level out the rate of change. If for example a glutten of mortgages come do after a 5 year period. that moment in time will determine how wide the tap is left open on the money supply. If terms where adjusted, lets say to a 4 year a 5.5year term for renewal, leaving the end date still at 25 years, then one more problem is fixed in our economy.
Lastly,
There shouldn’t be such a thing as Fixed mortgages, there should only be Capped mortgages. The BOC should have the flexablity to lower rates to all mortgage holders. In this way during a recession ALL mortgage holders would benifit from lower rates and a amount the interest rate would have to fluctuate would be less, and more broadly effective, covering more areas of the market because of the diversity of people it would affect.
–
The Solution begins with the problem.
I tell a story of an NDP buying all the poor people homes at Tax payers expence. Those people say thankyou, move in but can’t affort the heat because they have no jobs, the taxes don’t get paid ect.
–
The Tax payor now has less to spend, so he doesn’t buy that car, so Ford/GM lay off workers, and they become poor, and the NDP buys them homes.
–
The Solution is to Hire the Poor, they get a mortgage for a house, (the debt becomes their own, not the nations.)
–
The Problem therefore is a Money supply problem coupled with a Policy problem. You cannot create Imballance and fix it with “free Cash” That Cash must be washed through Labor.
–
There is no such thing as Cash, Cash is a paper given for Labor. Giving it incorrectly or giving too much of it creates a wild list of problems. Giving Cash for paper work and Glass buildings etc. is not the same as giving it for Food, Cars, homes etc.
–
Bullets don’t feed a family. If you work in the back yard planting flowers, you will have flowers, if you work planting beans, your going to have beans. You cannot plant bullets, sport cars and tennis courts and expect that a crop of beans will show up. Don’t let trade agreements and discounted TV’s from other countries spin the problem.
–
And the Problem is Deep because of another Factor. The Month by Month factor. We have a Drainage system called Bank Mortgages that draws money supply out of the system. If sleeping politicians don’t have the numbers or the skill sets to correct a problem, the clock still ticks on the Bank mortgage, but the Job creating product isn’t getting done. Unemployement and slowly applied stimulus money will cut a nation off at the knees.
–
IF a Stimulus program does all its work up front, that money flops over, month by month cycling in the economy over and over as each spends on each others labor and goods. They take out mortgages, the other ones get paid.
–
So it still comes back to Money supply, Labor and Time.
–
You also might not be aware but there is about 385 million gallons of gas being used by us each day. IF a Gallon is 50cents over priced, that is a Big dent in the money supply IF the Gas companies keep that bonus money in the bank.
–
Regardless, because the money supply is screwed up less labor is being done, that means there will be less product, and it will cost more.
–
Get your nation working. Do it now, don’t do it gradually, and don’t bail out banks, bail out workers, they will pay their bills if they have a job, and the banks will not need to be bailed out.
–
When people work, they pay taxes, produce product, lower the cost of living, and buy homes which will increase the money supply. The fact several Gov’ts have got things out of wack is the problem, so lets get back in the game.
Follow Reuters