Ottawa has renewed the Bank of Canada’s monetary policy framework, committing the central bank to continue to target inflation in a range of between one and three per cent but to also requiring it to consider the jobs picture when making its decisions.
The framework, which was unveiled at a press conference Dec. 13, commits the bank to maintain an inflation target of two per cent inside a control range of one to three per cent. The target will continue to be defined in terms of the 12-month rate of change in the total consumer price index (CPI), and will run for a five-year period, ending Dec. 31, 2026.
Bank of Canada governor Tiff Macklem said 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,” he said. “The government and the bank believe the best way that monetary policy can contribute to the well-being of Canadians is to continue to focus on price stability.”
Canada has recently seen inflation rise to a level it has not seen in nearly two decades, with the rate currently sitting at 4.7 per cent. The bank said the global financial crisis and COVID-19 pandemic have had a significant impact on the global economy and financial system, and major trends such as shifting demographics and new digital technologies are altering the economic landscape.
Finance Minister Chrystia Freeland
“I am very confident that this is the right decision for today and for the next five years,” she said. “This absolutely is a conformation of the mandate and the paramount performance of having a central bank that has a mandate to target inflation.”
But the government and the Bank of Canada also agreed to ensure that monetary policy supports a “maximum sustainable level of employment,” which is the highest level of employment the economy can expect to achieve without seeing inflationary pressures. The bank said that without maximum sustainable employment the shortfall in jobs and incomes will pull inflation below target, and without inflation near that target the economy would be less resilient to various shocks, leading to large fluctuations in employment.
“[Maximum sustainable employment] is important because few things are more central to the economic and financial well-being of Canadians than having a job,” said Macklem. “It’s also central to the price stability objective because keeping inflation on target over time requires an economy that is operating at maximum sustainable employment.”
Freeland said maintaining maximum sustainable employment is critical to having predictable levels of inflation.
“That is an economic fact, and the bank has already been quite rightly been taking that into account,” she said. “This mandate renewal represents the codification of existing practice.”
More information about the framework can be found here.
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