The Bank of Canada is launching what it calls an ambitious research agenda to further explore how other countries have responded to a financial crisis that has stretched conventional monetary policy “to its limits.”
Senior deputy governor Carolyn Wilkins says the central bank must be innovative with its existing monetary tools — particularly since structural changes have reduced the potential for Canadian economy to grow without boosting inflation.
Wilkins said if the Bank of Canada continues to use two per cent inflation as its target, there’s a greater chance than in the past that policy interest rates will tumble to zero.
The bank’s key policy rate is currently at 0.5 per cent, following two quarter-point cuts this year that were used to stimulate the economy and offset the impact of a dramatic decline in oil and gas revenues due to lower global prices.
“The current inflation-targeting framework is working well, so the bar for change is high, but history tells us we can’t cling indefinitely to a particular way of doing business,” Wilkins said in remarks prepared for a speech Friday in Toronto at the Rotman School of Management and the Munk School of Global Affairs.
“One important challenge for central banks now is that conventional monetary policy is stretched to its limits in some countries, where policy interest rates are at, or below, zero.”
The Bank of Canada, Wilkins added, is already taking a closer look at monetary-policy tools used by central bankers around the world — such as asset-purchase programs and negative nominal interest rates.
Wilkins also said the three-year plan aims to explore ways to respond to global changes already underway — such as China increasingly opening its financial markets to the world, the rise of alternative payment methods such as PayPal and the sharing economy’s growing popularity through services like Uber.
“As we think about alternative futures, we have to envision a world in which people mostly use e-money, perhaps even one that’s not denominated in a national currency, such as Bitcoin,” Wilkins said.
“This would create a new dynamic in the global monetary order, one in which central banks would struggle to implement monetary policy.”
She also said the bank will invest more in beefing up its economic modelling with a goal of helping to better inform federal authorities about policy decisions — whether they be monetary, fiscal or macro-prudential.