With direction from the federal government, the Bank of Canada’s “primary objective” over the next five years will continue to be targeting 2% inflation within a broader range of 1% to 3%.
That was the directive from Finance Minster Chrystia Freeland in the renewed mandate for the Bank of Canada, including an emphasis on supporting “maximum sustainable employment when conditions warrant.”
“Canadians value low and stable inflation. This point came through loud and clear during our extensive consultations in the lead-up to the renewal of this agreement,” said Bank of Canada Governor Tiff Macklem in a prepared statement. “Second, the Government and the Bank agree that monetary policy should continue to support maximum sustainable employment—that is, the highest level of employment we can expect to achieve without seeing inflationary pressures.”
A joint statement between the Government of Canada and the Bank of Canada released Monday said maintaining “low and stable inflation” is the best way to support a “strong and inclusive labour market.”
The renewed policy framework is a continuation of the inflation-targeting objective that was first implemented 30 years ago, which targets a consumer price index (CPI) mid-point rate of 2%. This objective will remain in place until at least December 31, 2026.
“The Government and the Bank acknowledge that a low interest rate environment can be more prone to financial imbalances,” reads the joint statement. “In this context, the Government will continue to work with all relevant federal agencies to ensure that Canadian arrangements for financial regulation and supervision are fit-for-purpose and consider changes if and where appropriate.”
Observers noted that the Bank of Canada will continue to operate under its previous framework, albeit with more leeway with its inflation band as opposed to a fixed rate.
“For markets, the takeaway is that the BoC will be more tolerant of inflation inside the 1%-to-3% band, rather than always focusing on 2%, as long as inflation expectations are anchored,” wrote BMO economist Benjamin Reitzes.
“That will enable them to keep policy easier for longer if the labour market warrants it,” he added. “However, this changes little for the BoC in the near-term as the labour market has little slack and inflation is well above the 1%-to-3% band.”
RBC’s senior economist Josh Nye noted that this announcement doesn’t change the bank’s expectations for the Bank of Canada to begin hiking rates in April, with three quarter-point rate hikes over the course of 2022.
“…added focus on the labour market should be seen as status quo and, in any case, doesn’t necessarily call for a more dovish approach to monetary policy,” Nye wrote. “With the unemployment rate back down to 6%, the employment rate close to pre-pandemic levels, and wage growth starting to pick up, we think recent data point to limited labour market slack.”
Scotiabank’s Derke Holt was less convinced of the objective of “codifying” the government’s concerns about the labour market.
“The peppering of references toward maximum employment and inclusion goals alongside simultaneously downplaying the prominence of such goals put a campaign spin on monetary policy that sowed confusion among market participants,” he noted.
“Overall, it would have been better to leave the wording unchanged in this sensitized, populist environment marked by concerns about governments seeking to more directly interfere in the operations of central banks,” he continued. “Central bank watchers already knew that labour conditions matter, but having governments lead a process to codify this is a bit insensitive toward market concerns.”
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