Canada’s top banker says the central bank’s approach to inflation targets has been working reasonably well, but there are gaps that could be addressed with the development of new computer economic models.
Bank of Canada governor Stephen Poloz said the bank has been pursuing inflation targets for 25 years, and the average rate of inflation has been extremely close to target over that time.
Poloz said the 2007-09 global financial crisis is one example where economic models struggled to explain what led to the crisis and what followed.
He said it can take up to two years for a change in interest rates to have its full effect on inflation, and central bankers need tools that can forecast where inflation is likely to be two years from now so they can adjust monetary policy to hit the inflation target.
“This experience is now guiding the work of model builders,” Poloz said Tuesday during a speech in Edmonton.
Poloz said the new U.S. administration is already affecting Canada’s economy.
He said the rising value of the U.S. dollar has taken the Canadian dollar with it, which is creating head winds for Canadian exports.
Global bond yields are also up since the new administration entered the scene.
“That is affecting our mortgage rates already, which is already a source of slowing the Canadian economy.”
Poloz said it is too soon to model how possible changes to trade agreements will impact Canada.
He said even when the details are known it will be challenging to measure their effect.
“The way we think of it know is uncertainty has risen in the wake of the election, and that is likely to feed through to investment thinking.”
There is a certain amount of positive sentiment in the business sector, but it isn’t clear if that means companies are ready to invest in Canada or the U.S., he said.
Poloz said the Canadian and U.S. economies are not the same and he doesn’t expect the Bank of Canada to have the same monetary policies as the U.S.