Is the Bank of Canada’s 2% inflation target too low?

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“We have to remember when 2% was the target for the past 20 years, the average was really 1.8%, not 2%. We were below,” he said. “So what happens if it’s 2.2%, 2.3%, 2.4%? Close enough? You can put a spin and say that it’s close enough.

“On average, it will be 2% from a long-term perspective, [so] therefore we can leave it at 2.5%. You don’t have to bring it to 2%. I think that’s the way to look at it [with] the way it was undershooting for long periods of time.”

The central bank will not “tip the economy” over inflation that remains slightly higher than 2%, Tal said – but there’s no imminent prospect that it will readjust its inflation target in the short term.

“You can make the point that maybe a new target is needed given the structural change of the economy, but from a practical perspective this is an academic discussion,” he said. “It’s not going to happen.

“For 20 years they told us that the number is 2%. So in order to change it from two to three, you have to come up with PhDs, studies, research coordinate with [other] central banks… They cannot just raise it like that because they feel like it, because then they will lose credibility.”

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