Could the Bank of Canada move the goal posts on their inflation target?

Canadian CPI at 12.30 GMT will be watched closely by the BOC

With BOC head Stephen Poloz taking a slightly more dovish tone in recent speeches, the market might now bee looking for clues that would tip his hand into cutting rates. Inflation is obviously a big factor in that and today we get the latest reading for August.

Running at 1.3% y/y in headline CPI and 2.1% in the core, Poloz pretty much has inflation right where he wants it, in terms of the BOC control target of 1-3%.

Canadian CPI & core y/y

He'd prefer CPI at the 2.0% mid-point target but life is full of these little disappointments, isn't it? Today we're expecting a tick up in CPI to 1.4% and a tick down in the core to 2.0%.

The inflation control target has been subject to some scrutiny as the BOC tend to assess and renew the control target every five years. That five year period runs out at the end of this year (it was last renewed in Nov 2011). There's many a central bank around the world looking at what the "new normal" could be for rates, growth, and inflation could be, and they're not doing that unless they are also looking to change their targets to reflect that new normal. If they do, we all know which way those revisions will go.

BOC's Wilkins broached the subject in her recent speech last week, and said that the bar for changing the inflation target is high. I don't know about you but that's not a complete door slam on the idea.

For today, inflation hitting expectations shouldn't rattle any cages but if we miss or beat by 2 ticks or more either way we could well get a move in the Canadian dollar. A bigger move is likely if it's a miss, as that will play into the hands of those thinking about rate cuts, and thus will see USDCAD rising.