The Bank of Canada should continue to target an inflation rate of 2% using monetary policy, says the C.D. Howe Institute in a new research note.

The case for more rate hikes seems clear, the note says. “Canada’s unemployment is at a 30-year low, demand is growing faster than the economy’s capacity to produce, inflation is above the 2% target, and surveys show that people expect it to remain above the target,” it explains.

“Yet economy-wide statistics mask major regional disparities. Newfoundland and the energy- and resource-rich West are riding a worldwide commodity boom, while Central Canada’s manufacturers are already facing increasing competition from Asia. Since these manufacturers are also seen as suffering from an exchange rate that has been buoyed by interest-rate increases, the Canadian dollar’s flirtation with levels around US87¢ might suggest that the Bank should temper the rise in its target for the overnight rate,” it allows.

However, it rejects that view, maintaining that the Bank of Canada should continue to steer policy with its eyes firmly on domestic indicators of inflationary pressure. “Large divergences between the fortunes of different sectors of the economy, and regions of the country, in the face of world economic shocks make it harder for the Bank to hit its inflation target,” it concedes. “They do not, however, make it any less desirable that it try to do so.”

“The value of an inflation target is that it tells Canadians, as consumers and investors, what the purchasing power of their money will be in the future. When, as now, international forces are straining the Canadian economy, that value is all the greater,” it concludes.