The Bank of Canada “will continue” to be tasked with keeping inflation at 2% over the long term, while monitoring employment.
Federal Finance Minister Chrystia Freeland and Bank of Canada Governor Tiff Macklem vigorously defended Monday for choosing a dual mandate as the United States did for the Federal Reserve American. “It is now a question of continuity”, underlined the minister during a statement concerning the process of renewal of the framework of monetary policy for the next five years.
“Maintaining a stable environment for the prices Canadians pay is the central objective of Canadian monetary policy. This has been the case for the past 30 years. This will remain the case for the next five years, ”she said in response to a question from reporters. But when circumstances dictate and the flexibility of its framework allows, the Bank should also “continue to support the achievement of the maximum sustainable level of employment”, added Mr.me Freeland, specifying that this would only be an “explicit recognition of what the Bank was already doing, and rightly so”.
“This deal is really about continuity and clarity,” said Tiff Macklem.
The announcement comes against a backdrop of a series of factors the Bank of Canada calls “temporary” – such as disruptions and bottlenecks in supply chains, droughts and soaring oil prices – has been pushing consumer prices sharply upward for several months, but where the central bank is reluctant to raise its key rate to calm the inflationary surge for fear of damaging the economic recovery underway. Last I heard, inflation was 4.7% over 12 months in Canada, and the unemployment rate (6%), a few tenths of a point from its pre-pandemic level.
The Bank will thus retain its mission of maintaining the average increase in the Consumer Price Index (CPI) over 12 months at the “low, stable and predictable level” of 2%, defined as “the midpoint of a range. which ranges from 1% to 3% ”. Since adopting this approach three decades ago, it has done its job remarkably well, she said, maintaining average inflation of 1.9% since 1991.
Changes in continuity
Conducted jointly and “without preconceptions” by the federal government and the Bank, the latest review of the monetary policy framework began two years ago and was the most comprehensive in the past 30 years, explained Tiff Macklem. The two instances compared half a dozen possible approaches, including the dual mandate, and carried out simulations. Many experts and the public were also consulted: 53% of Canadians say they favor stable and predictable inflation, 27%, sustained economic growth, and 20%, the maximum sustainable level of employment.
According to the findings of the review, it would be best to stay with the current model of “flexible inflation targeting”, among other things because of its effectiveness, its impact on financial and economic stability and its its easy comprehension by the greatest number.
We continue to expect that the Bank of Canada’s key rate may, in times of crisis, quickly reach its lowest level and force the institution, as in recent years, to resort to other monetary intervention tools, such as the massive injection of liquidity (quantitative easing). The Bank will also, it is said, have to take into account in its analyzes the growing influence on the economy and finance of factors such as climate change, labor scarcity and inequalities.