Canada Inflation Targeting

By: EconomyWatch   Date: 14 October 2010

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Canada Inflation Targeting has set out a framework that will offer a series of targets to achieve low inflation. Therefore, financial product and labor markets can adjust their long term inflation expectations and reduce the risk premiums. Not only that but also inflation targets, which determine the credibility and transparency, will be conveyed easily. These are the desirable elements of the monetary policy process.
History of Inflation Targeting in Canada:
In Canada, inflation targeting started with an agreement between the Bank of Canada and the Federal Government. This agreement has been renewed thrice. From then, the target for the annual rate of total consumer price inflation is on the half way mark now.

Framework of Canada Inflation Targeting Framework:
  • Inflation targeting is considered a continuous way to achieve solid growth in output and employment by keeping inflation low.

  • It is set to avoid deflation or high inflation to run the economic operation in a balanced manner.

  • Canada Inflation Target helps the Canadian banks to make their monetary policy transparent to the customers.

Future of Inflation Targeting:
  • Since the agreement between the Federal government and bank of Canada has been renewed, focus is on the areas of inflation targeting where change is necessary. Moreover, the Canadians are more familiar with not inflation targeting but Consumer Price Index (CPI), so the choice of the total Consumer Price Index as the target need not be changed.

  • It should examine whether the price level or inflation rate should be targeted .

  • By inflation targeting a symmetric approach of keeping inflation low, stable, and predictable will be achieved. This is a groundwork for solid, sustainable growth in output and employment.

  • By inflation targeting the Canadian central bank will be able to confront and acclimatize the major movement in asset prices.


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