Canada's Inflation-Control Strategy Inflation Control and the Economy

(excerpt from the November 2000 Monetary Policy Report)

  • Inflation control is not an end in itself; it is the means whereby monetary policy contributes to solid economic performance.

  • Low inflation allows the economy to function more effectively. This contributes to better economic growth over time and works to moderate cyclical fluctuations in income and employment. The monetary policy instrument

  • As of December 2000, announcements regarding the Bank's policy instrument—the Bank Rate, which establishes the top of the operating band for the overnight interest rate—will take place, under normal circumstances, on eight pre-specified dates during the year.

  • In setting the Bank Rate, the Bank of Canada influences short-term interest rates to achieve a rate of monetary expansion consistent with the inflation- control target range. The transmission mechanism is complex and involves long and variable lags—the impact on inflation from changes in monetary conditions is usually spread over six to eight quarters. The targets

  • In February 1991, the federal government and the Bank of Canada jointly announced a series of targets for reducing inflation to the midpoint of a range of 1 to 3 per cent by the end of 1995. In December 1993, this target range was extended to the end of 1998. In February 1998, it was extended again to the end of 2001.

  • By the end of 2001, the government and the Bank plan to determine the long-run target for monetary policy consistent with price stability. Monitoring inflation

  • In the short run, a good deal of movement in the CPI is caused by transitory fluctuations in the prices of food and energy, as well as by changes in indirect taxes. For this reason, the Bank focuses on the CPI excluding food, energy, and the effect of changes in indirect taxes. This measure is referred to as the core CPI.

  • Over longer periods, the measures of inflation based on the total CPI and the core CPI tend to follow similar paths. In the event of anticipated persistent differences between the trends of the two measures, the Bank would adjust its desired path for core CPI inflation so that total CPI inflation would come within the target range.