The Bank of Canada continues to believe in inflation targeting, although Tiff Macklem, deputy governor, suggested that the central bank may tweak the its inflation measures and time horizon for monetary policy.

Speaking yesterday at the University of Western Ontario in London, Ont., Macklem noted that the Bank’s agreement with the federal government is up for renewal in 2006.

“As we prepare to renew the agreement, we are looking closely at elements of our framework, as well as at the experiences of other inflation-targeting countries, to see if there are ways to improve,” he said.

“Overall, Canada’s framework for the conduct of monetary policy, with the explicit goal of keeping inflation at the 2% midpoint of a 1% to 3% target range, has served us well. As we look to renew the agreement, we would not expect the commitment to controlling inflation or to communications and transparency to change,” he said, although it is pondering a few technical questions.

One of the issues to review is the measurement of core inflation and the experience with this measure, Macklem said. Other questions relate to whether 18 to 24 months is the most appropriate time horizon for monetary policy to bring inflation back to target after various types of shocks.

“For example, do big swings in asset prices contain any information about future inflation beyond our typical policy horizon? If they do, it might be appropriate, in certain circumstances, to lengthen the time horizon for returning inflation to target,” he said. “On the other hand, the reduction in the persistence of inflation that we have seen under inflation targeting suggests that a shorter time horizon may be appropriate. Changes in the structure of the economy may also have implications for the appropriate time horizon. For example, globalization may have altered both the way and the time frame in which our economy adjusts to movements in exchange rates.”

“Given the success to date of handling shocks within an 18- to 24-month horizon, we should not change this element of our framework lightly. But, as inflation targeting evolves, we will need to think hard about the appropriate time horizon in dealing with various shocks,” he noted.

He concluded by saying that inflation targeting has proven to be a very successful monetary regime for Canada. And, he said it would be big mistake to abandon an inflation anchor just because consumer price inflation has been low and relatively stable. “Keeping inflation and inflation expectations anchored on the target is the key to minimizing the distortions caused by inflation while, at the same time, providing a stabilizing influence for the economy,” he said.