(Ottawa) Finance Minister Chrystia Freeland on Monday renewed the inflation target to 2%, avoiding giving the Bank of Canada a double mandate. The latter will, however, formally have to take full employment into account in the formulation of its monetary policy.
“Before, it was implicit and now, it has become explicit,” explained in an interview professor emeritus of economics at the University of Ottawa Serge Coulombe.
The renewal of the central bank’s mandate comes after extensive consultation and analysis of several models, including that of the US Federal Reserve’s dual mandate, which must maintain both price stability and full employment.
Minister Freeland has opted instead for continuity by maintaining the inflation target at 2% over a period of 12 months. The Bank of Canada will therefore be able to develop its monetary policy to stay within the 1% to 3% range, as it has done since 1991, while continuing to take into account the “maximum sustainable level of employment”. This new five-year mandate will end on December 31, 2026.
“I urge people to see the renewal of this framework as a reaffirmation of the tools available to the Bank of Canada to fulfill its mandate in a world where there is a lot of uncertainty and volatility,” said the Minister of Finance, Chrystia Freeland, at a press conference.
At his side, the governor of the bank indicated that he would thus have the flexibility necessary to carry out his task. “With respect to the current situation, I want to assure Canadians that we want to lower inflation without stifling the economic recovery,” said Tiff Macklem.
The Bank of Canada recently kept its key rate at 0.25%, although inflation is currently well above its target. The Consumer Price Index (CPI) jumped to 4.7% in October and the governor expects it to remain high for the first six months of 2022, then move closer to the target of 2 %.
PHOTO FRANÇOIS ROY, THE PRESS
The Bank of Canada will continue to keep inflation within a target range of 1% to 3%.
However, a hike in the key rate could slow down the recovery of the labor market hard hit by the pandemic. “We have been operating with a certain flexibility in terms of monetary policy for a few months now, because in normal times, with inflation at 4.7%, we would not have zero interest rates. », Noted the principal economist of the Mouvement Desjardins, Benoît Durocher.
“So, it’s clear that we are not in normal times, he added. We are still in the midst of a pandemic, so we have to be a little more flexible. We were already somewhat in this flexibility, it’s just that we have just made it official. ”
Strong reactions from the opposition
The Conservatives, who have been denouncing rising inflation for weeks, do not see it that way. For them, this new mandate amounts to a “politicization of the central bank”.
“Nothing in the announcement made by the Minister of Finance and the Governor of the Bank of Canada suggests that they will stop raising the cost of living,” criticized their finance critic, Pierre Poilievre. Printing money to pay for government spending caused the highest rise in the inflation rate in two decades and created a dangerous housing bubble. ”
“Wanting at all costs in the short term to return to the range of 1 to 3%, there would be a very great price to pay,” warned the Bloc Québécois MP Gabriel Ste-Marie, an economist by training. If the Bank of Canada were to raise rates fast and hard, it would have a big impact on for all those with high mortgage debt. ”
For New Democrats, renewing the Bank of Canada’s mandate will not help relieve those struggling to make ends meet with soaring prices. Its finance spokesman Daniel Blaikie is calling for help in the economic update.
“We urge the government to make it easier for people to find affordable housing, to make cell phone and internet bills cheaper, to help Canadians cope with the impact of pandemic and to help people renovate their homes and reduce the cost of heating, ”he demanded.