Bank of Canada releases Monetary Policy Report
CANADA’S INFLATION-CONTROL STRATEGY
Infl ation control and the economy
Infl ation control is not an end in itself; it is the means whereby m • onetary policy contributes to solid economic performance.
• Low, stable, and predictable infl ation allows the economy to function more effectively. This
contributes to better economic growth over time and works to moderate cyclical fl uctuations in
output and employment.
The monetary policy instrument
• Announcements regarding the Bank’s policy instrument—the target overnight interest rate—take
place, under normal circumstances, on eight pre-specifi ed dates during the year.
• In setting a target for the overnight rate, the Bank of Canada infl uences short-term interest rates
to achieve a rate of monetary expansion consistent with the infl ation-control target. The transmission
mechanism is complex and involves long and variable lags—the impact on infl ation from
changes in policy rates is usually spread over six to eight quarters.
The targets
• In February 1991, the federal government and the Bank of Canada jointly agreed on a series of
targets for reducing total CPI infl ation to the midpoint of a range of 1 to 3 per cent by the end of
1995. The infl ation target has been extended a number of times. In November 2006, the agreement
was renewed for a period of fi ve years to the end of 2011. Under this agreement, the Bank
will continue to conduct monetary policy aimed at keeping total CPI infl ation at 2 per cent, with a
control range of 1 to 3 per cent around the target.
Monitoring infl ation
• In the short run, a good deal of movement in the CPI is caused by transitory fl uctuations in the
prices of such volatile components as fruit and gasoline, as well as by changes in indirect taxes.
For this reason, the Bank uses a core measure of CPI infl ation as an indicator of the underlying
trend in infl ation. This core measure excludes eight of the most volatile components of the CPI
and adjusts the remaining components to remove the effect of changes in indirect taxes.
