Bank of Canada renews inflation targeting mandate for next five years, still targets 2 pct with tweaks

The Canadian central bank and the Federal Department of Finance yesterday stated the renewal of the Bank of Canada’s inflation targeting mandate for the next five years, noted TD Economics. The central bank would keep on targeting the year-on-year change in the CPI, while the level of target remains at 2 percent, with 1 percent to 3 percent inflation-control-range around it.

Significantly, while the target of inflation continues to be the same, the central bank has altered the gauge of inflation that it uses as an operational guideline. Core inflation (CPIX), which strips the eight volatile components of overall inflation, would not be used anymore as the preferred measure of the BoC. Rather, the central bank would consider three measures of core inflation – CPI-trim, CPI-common and CPI-median, stated TD Economics.

According to TD Economics, the Canadian central bank and the government have chosen quite a conservative path forward. The new measure of the BoC should lower the requirement for special adjustments in examining core inflationary pressures.

However, assessing the BoC’s view of core pressures would possibly become more difficult with more inflation measures to choose from, added TD Economics.  In the past, the three core inflation measures have diverged considerably from each-other. Such divergence might lead to a communications challenge for the BoC.