Bank of Canada to Revisit Inflation-Targeting, Shadowing Fed: Reuters Poll

Bank of Canada to Revisit Inflation-Targeting, Shadowing Fed: Reuters Poll
The Bank of Canada building is pictured in Ottawa in a file photo. (Reuters/Chris Wattie)

The Bank of Canada will remain in a holding pattern and likely follow the U.S. Federal Reserve's path of reviewing its current inflation-targeting framework to protect the economy from the fallout of the coronavirus, a Reuters poll showed.

Just before the Fed's landmark decision to change its approach towards inflation rate targeting, BoC Deputy Governor Lawrence Schembri said the ongoing pandemic would test public confidence in the central bank's 2 percent inflation rate target due for a revision in December 2021 .

Over 30 economists in a Reuters poll predicted the BoC, which next meets on Sept. 9, would keep interest rates unchanged at 0.25 percent until at least the end of 0222.

But 13 out of 19 economists said the BoC would review its inflation framework before the 2021 deadline, with most seeing the central bank moving towards targeting an inflation average, like the Fed has done.

"If the BoC does not follow the Fed towards greater flexibility, a relatively tighter policy stance could become counterproductive to maintaining inflation and economic stability," said Beata Caranci, chief economist at TD.

"We suspect that road won't be crossed and the BoC will evolve its policy mandate. It may choose not to follow the same direct objective [as the Fed] but the end result of lower for longer will be the likely outcome."

Inflation was expected to average 0.7 percent and 1.6 percent this year and next, according to the poll of economists. They forecast core inflation, which the BoC looks at closely when deciding on rates, would remain well below 2 percent throughout the forecast horizon.

That outlook comes even as the government and central bank have delivered billions of dollars in stimulus to help shield the economy from the coronavirus fallout. Over 130,000 people have been infected in Canada.

But not all economists polled expected the central bank would change its inflation-targeting framework.

"The BoC's behaviour–as reflected in measures of inflation expectations–has been more akin to treating 2% as the ceiling even after prolonged periods of undershooting," said Derek Holt, head of capital markets economics at Scotiabank.

"Perhaps [it would] consider heightened emphasis upon how 2 percent is an average target within the symmetrical 1-3 percent range."

The central bank should maintain its existing monetary policy and slowly exit from its quantitative easing programme, a smaller sample of economists said.

"Evolution is fundamental to achieving economic and financial stability. The economy and its structure are not static over time, nor should there be an expectation of the same from policy leaders," added TD's Caranci.

By Mumal Rathore