stephen s poloz : 25 years of inflation targets – certainty for uncertain times remarks by mr stephen s poloz, governor of the bank of canada, to the business council of british columbia, vancouver, british columbia, 1 november 2016. * * * introduction these are uncertain times in the global economy, and anything that can be done to lessen uncertainty is welcome. last week, the bank of canada and the federal government took an important step to provide some certainty, to both companies and consumers, by signing a fiveyear renewal of our inflation - targeting agreement. this year marks the 25th anniversary of inflation targeting in canada. that is a long time — so long that a whole generation of business leaders and consumers has not had to deal with the uncertainty associated with high and variable inflation. it is human nature to take for granted things that have been around for a while. the bank of canada will never take for granted the benefits of inflation targeting, and last week ’ s renewal makes it timely to remind people of the benefits that inflation targeting has delivered, as well as the difficult journey we took to get here. finding an anchor twenty - five years is the silver anniversary, but inflation targeting has truly been golden. as an approach to monetary policy, inflation targeting has proven its worth repeatedly, both in good economic times as well as turbulent ones. canada was just the second country to adopt this approach. now, inflation targeting — narrowly defined — is being practised by 36 central banks representing 37 per cent of the world ’ s economy. when you add the us federal reserve, which has inflation control as one of its mandates, and the european central bank, which has a mandate to keep inflation below 2 per cent, 64 per cent of the world economy is following some form of inflation targeting. but to understand how important an advance this system represents, you need to look back to the bad old days of the 1970s and 1980s. inflation was not only much higher than today, but it was also much more variable. annual inflation reached more than 12 per cent in 1974, dropped to less than 6 per cent two years later, then jumped back to over 12 per cent in 1981. it was impossible to predict with confidence what the inflation rate would be from one year to the next. from an employer ’ s point of view, high and variable inflation made it extremely difficult to do the hard math required to run a business. high inflation meant companies constantly faced “ menu costs ” associated with having to regularly adjust prices. those costs

as policymakers, the most. let me now turn to those. our one bank research agenda is structured around five themes which span all aspects of central banking. the themes are broad. that reflects the diversity of our agenda. they focus on the interactions and intersections between policy areas. they emphasise new challenges and new directions, while recognising that familiar questions facing central banks remain no less important. today ’ s conference is organised around them. the first theme covers “ policy frameworks and interactions ” the re - emergence of macroprudential instruments as part of the policy armoury raises fundamental questions about the interaction of monetary policy, macroprudential policy, and microprudential policy. it is essential to improve our understanding of the relationship between credit cycles and systemic risks. since credit market developments both affect and reflect potential growth in the broader economy, they – and macroprudential measures to influence them – require careful study by financial and monetary policymakers alike. the advent of a new, enhanced policy toolkit raises vital questions about the effectiveness of individual policy tools ; their joint operation ; and how they interact domestically and across borders. the second theme covers “ evaluating regulation, resolution, and market structures ” the financial crisis precipitated a radical overhaul of the approach towards regulation, supervision and resolution. regulatory policies have shifted from a near - exclusive focus on microprudential resilience to a more balanced emphasis on minimising systemic risk. in the whirlwind of essential change, there has been, however, relatively little assessment of the overall effect of reform on the financial system as a whole. moreover, our understanding of the “ system ” must extend well beyond the banking sector to encompass the whole of market - based finance. the interplay between the reform process and the changing nature of financial intermediation also raises fundamental questions about how incentives and market structures might evolve and what policy might need to do to keep up. the third theme covers “ policy operationalization and implementation ” the practice of central banking constantly underscores that implementation and communication of policy can be as important as its design. during the crisis central banks around the world made extensive and imaginative use of their balance sheets in pursuit of their objectives. bis central bankers ’ speeches this extraordinary range of policy responses provides an unparalleled opportunity to take stock of what worked, and why. as ben bernanke observed “ the trouble with qe is it works in practice, but it doesn ’ t