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Bank of Canada eyes possible higher inflation target

Bank of Canada eyes possible higher inflation target

OTTAWA (Reuters) - The inability to cut interest rates below zero to stimulate the economy in the aftermath of the recent financial crisis has caused the Bank of Canada to begin considering whether it should raise its 2 percent inflation target, the bank said on Tuesday. Deputy Governor Agathe Cote said another argument in favor of raising the target was that interest rates are likely to be lower than before the crisis, and this increases the likelihood of being constrained by zero percent - a phenomenon known as the "zero lower bound." "Together, these factors suggest that consideration should be given to an inflation target that is above 2 percent," Cote said in a speech in which she outlined areas the central bank would examine ahead of the late 2016 renewal of its inflation-targeting agreement with the federal government. However, she said the system was not broken and the bar for change was therefore high. There was good reason to be cautious about targeting a higher level of inflation, because changing what has come to be perceived as stable and achievable could cause the target to be regarded as temporary and less credible. Cote said the bank would also be examining the extent to which monetary policy should be used to address financial stability risks, such as those from increased housing prices and household debt. She said such risks have been edging higher in Canada. Finally, in the run-up to the 2016 target renewal, the bank will research whether it should continue to identify one preeminent measure of inflation as its operational guide and whether this should continue to be the core rate of inflation. (Reporting by Randall Palmer; editing by Leah Schnurr)

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