Inflation isn’t enough to escape ‘Trouble’: BC

Bloomberg

Policy makers should move beyond short-term budget and inflation targets that leave their economies exposed to longer-term debt bubbles like the ones hindering growth since the 2008 financial crisis, Bank of Canada Governor Stephen Poloz said.
Central banks with inflation targets like Canada’s are finding that the benefits gained from short-term stability can create dangers in the background as government or consumer debt rises, Poloz said in a lecture Saturday at the University of Ottawa honoring his former professor Doug Purvis.
“While experience shows that inflation targets have improved macroeconomic performance, the experience of the global financial crisis and its aftermath demonstrates well that such targets are not sufficient for preventing trouble,” Poloz said.
Government leaders also need to coordinate more with central banks in the future to make sure that the collective mix of economic policies avoids a destabilizing build-up of consumer or government debt, Poloz said. That has to be done without compromising the independence of central banks that keep inflation in check, he added.
Poloz’s lecture revisited decades of Canada’s monetary and fiscal policy choices and reran models to show the implications for debt stock if, for example, governments chose to ramp up deficit spending. The results showed different forms of policy stimulus could drive up either private sector or government debt.
Canada’s top central banker didn’t comment on the outlook for the current 0.5 percent policy rate. He did say that the export recovery since the global crisis has been tepid.