Revision of the Bank of Canada’s Authority... Reaffirming the 2% Inflation Target + Adding Flexibility

When Confirming 2% Inflation, Maximum Employment Also Reflected in Monetary Policy... Importance of 1-3% Inflation Range Expected to Grow

[Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] The Bank of Canada (BOC), together with the government, reviewed the amendment of the BOC’s mandate and decided to maintain the existing regulation that prioritizes achieving the 2% inflation target as the top priority of BOC’s monetary policy. The BOC will maintain the single monetary policy goal of price stability but will consider employment as an important factor in monetary policy operations when there is confidence in price stability.

The BOC mandate is revised every five years. The current mandate expires at the end of this month. Accordingly, the BOC and the government discussed whether to amend the BOC mandate and announced the results at a joint press conference on the 13th (local time). Basically, the BOC decided to maintain the existing regulation that operates monetary policy based on the principle of targeting 2% inflation with an allowable range of 1-3%.

According to The Wall Street Journal (WSJ), the BOC and the government stated in a joint statement, "The government and the central bank believe that the best monetary policy contributing to the welfare of Canadians continues to focus on price stability," and "The fundamental (monetary policy) goal is to keep inflation low and stable over the long term."

However, the BOC and the government said, "If conditions permit, we have decided to add flexibility in setting the policy interest rate to achieve the maximum sustainable level of employment," and "The BOC will only utilize the flexibility of the 1-3% inflation target range when medium-term inflation expectations are stably anchored at 2%."

In other words, if there is confidence that the medium-term inflation rate can be maintained at around 2% and actual inflation is within the 1-3% allowable range, monetary policy can be operated with an emphasis on employment.

Benjamin Reitz, an economist at BMO Capital Markets, said, "The new mandate emphasizes the 1-3% inflation target range more." Economist Reitz explained, "Employment will be applied when necessary rather than firmly limiting monetary policy operations," adding, "This will give the BOC more flexibility."

The BOC was the first among the Group of Seven (G7) central banks to introduce an inflation target as the benchmark for monetary policy operations in 1991. The U.S. Federal Reserve (Fed) operates monetary policy with a mandate pursuing two goals: 'price stability' and 'full employment.' Unlike the Fed, the BOC operates monetary policy to achieve the single goal of price stability.

Through this mandate revision, the BOC has stated the principle of maintaining the single goal of price stability while reflecting employment, but focusing more on inflation than employment.

Deputy Prime Minister and Minister of Finance of Canada, Chrystia Freeland (left), and Tiff Macklem, Governor of the Bank of Canada (BOC), are holding a joint press conference on the 13th (local time).
Photo by Reuters Yonhap News

Canada’s Finance Minister Chrystia Freeland said that the addition of language regarding employment does not mean a change in the inflation targeting framework. Minister Freeland emphasized that it rather reaffirms the existing inflation-focused monetary policy and aims to produce the best outcomes through the existing inflation-centered monetary policy operations.

BOC Governor Tiff Macklem also said that the existing inflation-focused framework of the BOC has proven effective in responding to economic changes and during the economic recovery process. Governor Macklem explained, "The new agreement expresses a way to continue responding flexibly to the challenges facing the Canadian economy," and stated, "The BOC will focus on returning inflation to 2% without undermining the economic recovery."

Although the BOC’s monetary policy goal is solely price stability, the BOC has effectively treated employment as a significant variable in its monetary policy operations.

Canada’s consumer price inflation rate reached 4.7% in October, the highest in 18 years. However, at the last monetary policy meeting, the BOC decided not to raise the policy interest rate and kept it unchanged, stating it would maintain the zero-level policy rate of 0.25% until spare economic capacity is absorbed. This means the BOC intends to keep interest rates low to allow employment to increase further. Additionally, the BOC stated that although inflation would remain high in the first half of next year, it would fall to around 2% in the second half. This suggests that the medium-term inflation outlook aligns with the monetary policy target, and the decision to hold the policy rate considered employment.

In its statement, the BOC said, "We have decided to maintain flexibility to help secure full and sustainable employment as conditions permit in response to the economic crisis." The BOC also explained that the inflation target reflects achieving low inflation accompanied by maximum employment, as both are necessary for a sustainable economy.

This content was produced with the assistance of AI translation services.