Central banks must adopt new approaches for handling, preventing crises: Carney

OTTAWA – Bank of Canada governor Mark Carney says he believes a new more flexible approach to central banking may be needed to tackle the challenges of today’s interconnected economy.

In one of his last major addresses before departing for the Bank of England next month, Carney says the Canadian central bank is in the process of researching the impact of policies and possible approaches for future potential crises.

One thing that appears clear, he says, conventional policy of strictly targeting a set inflation marker is not adequate in all circumstances, particularly during exceptional economic times.

He notes the success of the policy itself might have exacerbated the 2008-09 financial crisis by instilling a false sense of security among market players and consumers that led to greater risk-taking.

And he points out that low and predictable inflation did little to prevent the crisis from happening.

In exceptional circumstances, he says the Bank of Canada has learned it might need to use monetary policy, such as raising interest rates, not strictly to meet an inflation target, but to cool down an overheated housing market, or other asset bubbles.

And he says central bankers have learned to use forward guidance, that is conditional pledges about policy direction, to try an influence how people borrow and spend.

The speech, advertised as wide-ranging lecture to University of Alberta faculty and students, will likely be closely read by policy-makers in England for clues on how their star catch is likely to conduct himself when he takes over the Bank of England on July 1.