I have prepared this letter in response to Roy Olsen's letter of March 9 "The link between gas and interest."
Inflation (cost of living) - control targetting has been a cornerstone of monetary policy in Canada since its introduction in 1991.
The Bank of Canada (BOC) targets inflation by:
The Consumer Price Index (total CPI): A measure of price movements produced by Statistics Canada and obtained by comparing the retail prices of a representative "shopping basket" of goods and services at two different points in time.
Core Consumer Price Index (core CPI): A variant of the CPI that excludes eight of the most volatile components prices, which account for 16 per cent of the CPI basket - (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation and tobacco products).
Core CPI inflation ("operational guide"): inflation measured by the core CPI (see above), thus excluding transitory fluctuations in the prices of the most volatile components.
Since the prices of the more volatile components of the CPI (gas and groceries), as well as the effect of changes in indirect taxes, cause a good deal of temporary movement in the total CPI, the BOC finds it helpful to use Core CPI as an operational guide to policy.
In English: inflation's targetted excluding gas and groceries, why - because of volatility. Fear not: sine 2008 BOC governor Mark Carney has guided Canada through very stormy waters.
It's not the BOC's mandate to raise the overnight rate (currently at one per cent). They're not sitting there waiting to stick it to the consumer. Look toward the banks for that.
One per cent is what the BOC charges banks, the banks add 1.75 per cent; but prime's three per cent - most will not remember, but the banks found another way to juice their revenues from borrowing.
As the Bank of Canada made a big cut in its trendsetting bank rate back in December 2008, banks did not follow.
The BOC slashed the overnight rate by three-quarters of a percentage point; the banks cut prime only half a point.
The truth is marginal growth for the prime lending rate this year and into next and something Mr. Olsen failed to mention is our loonie - it's a great equalizer when it comes to curbing inflation. That's a lesson for another day.
In closing I'd like to acknowledge my colleagues at the BOC for sharing some of the above information.
T.K. Beatty
Prince George
