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New Bank of Canada mandate maintains inflation target but keeps one eye on jobs picture, too

New Bank of Canada mandate maintains inflation target but keeps one eye on jobs picture, too

CBC
Monday, December 13, 2021 6:14 PM GMT

The Bank of Canada's new mandate will see the central bank continue to target inflation in a range of between one and three per cent, but keep one eye on the job market in making its policy decisions, too.

Finance Minister Chrystia Freeland and Bank of Canada governor Tiff Macklem detailed the bank's new mandate at a news conference in Ottawa on Monday morning.

The bank's five-year mandate expired this year, so Ottawa consulted with experts and stakeholder across the country to see if any changes were needed to adjust the guiding principle that the bank keeps top of mind in making its policy decisions.

Much like many other central banks, the Bank of Canada has targeted inflation since 1991, when its mandate was to set policy with a view to keeping inflation in a range of between one and three per cent.

All things being equal, that means the bank's only job is to try to nudge inflation up or down as needed. When inflation is low, the bank generally cuts its rates to encourage borrowing and spending and investment. It raises its rate when inflation is above that range to try to cool things down.

Generally speaking, the system has worked well for decades, but the pandemic has thrown a wrench in the works as sustained low interest rates implemented to deal with COVID-19 were a factor causing inflation to run near zero early on in the pandemic, but more recently has swung in the opposite direction and is currently sitting at an 18-year high.

There has been a suggestion in recent years that central banks should consider moving away from inflation targeting, and try to achieve other goals with their monetary policy. That could include setting their policy to encourage full employment, for example, or to raise or lower the value of the country's currency — even if that means inflation heats up or cools down as a result.

But after extensive consultations over the past year, Macklem said that it became clear that continuing to target inflation above all other considerations was still the best course of action.

"It's very hard to beat inflation targeting," he said. "It has served us very well."

WATCH | The difference between a dual mandate and the bank's new policy, explained:

The new mandate gives the bank the ability to keep targeting the inflation the way it always has, but gives it added leeway to consider what's happening with Canada's employment picture in setting its policy.

The government and the bank "believe that the best contribution of monetary policy to the well-being of Canadians is to continue to focus on price stability," the central bank said in a release, adding that they "also agree that monetary policy should continue to support maximum sustainable employment."

"The bank will continue to use the flexibility of the one to three per cent control range to actively seek the maximum sustainable level of employment when conditions warrant."

While that's a change, it's well short of implementing what's known as a "dual mandate" whereby the bank would be officially tasked with considering two things at once, weighing them against each other as needed, and theoretically trying to optimize both at once wherever possible,

Read full story on CBC
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