Cutting interest rates to increase inflation
There is a new line of thinking over at the Bank of Canada: rather than raising interest rates to maintain the inflation target at 2%, the Bank is now stating that it might have to cut rates (beyond the 25 bp reduction today and 50 bp a couple weeks ago) to maintain the target. From a central bank that in the last recession was all too eager to reduce inflation to zero, and as recently as last summer was blithely talking about shifting to price level targeting, this is quite the admission.
Check it out in today’s press release:
With excess supply projected to build throughout 2009 and lower assumed energy prices, inflationary pressures will ease significantly relative to the projection in the July Monetary Policy Report Update. Core inflation is now projected to remain below 2 per cent until the end of 2010. Total CPI inflation should peak during the third quarter of 2008, fall below 1 per cent in the middle of 2009, and then return to the 2 per cent target by the end of 2010.
… In line with the new outlook, some further monetary stimulus will likely be required to achieve the 2 per cent inflation target over the medium term.
Boy, am I glad I chose the variable rate mortgage a year ago; being an economist has saved me a few thousand dollars a year in mortgage interest. Interestingly if we turn back the Bank’s clock a year, it makes for an interesting contrast with today’s announcement:
Against a backdrop of robust global economic expansion and strong commodity prices, … the Canadian economy is now operating further above its production potential than had been previously expected. The core rate of inflation, which has been above 2Â perÂ cent for the past year, was 2.2 per cent in August. Total consumer price inflation fell temporarily in August to 1.7 per cent, having been above the 2Â perÂ cent inflation target since the spring. … [T]he Canadian economy is projected to grow by 2.6 per cent in 2007, 2.3 per cent in 2008, and 2.5 per cent in 2009.