Inflation-ControlTargetBackgrounder.pdfVIP

Inflation-Control Target Inflation targeting has been the cornerstone of Target for the Overnight Rate),1 which in turn influences Canadian monetary policy since 1991. other market interest rates in the economy. The initial objective of the joint inflation-control Monetary policy actions take time—usually between agreement between the Government and the Bank six and eight quarters—to work their way through the of Canada was to reduce inflation, as measured by economy and to have their full effect on inflation. For the total consumer price index (CPI), from a rate of this reason, monetary policy is always forward looking about 5 per cent in late 1990 to 2 per cent by the end and the policy rate is set based on the Bank’s judg- of 1995. Inflation reached the target well ahead of ment of where inflation is likely to be in the future, not schedule; and so the focus in the 1995 agreement what it is today. shifted towards keeping it low, stable and predict- able over the medium term, at an annual rate of 2 per Inflation targeting issymmetric cent—the midpoint of a control range of 1 to 3 per The Bank views the risks of inflation moving above or cent. below target as equally serious and acts symmetrically to avoid both risks over the medium term. Such an The inflation-control target has been extended five approach guards against both high inflation and persis- times since 1991—in 1993 (for the period 1995-98), tent deflation. 1998, 2001, 2006, and 2011 to the end of 2016. The inflation-targeting approach to When demand is too strong, pushing the economy against its capacity limits, and there is a risk that monetary policy future inflat