The Bank of Canada has renewed its policy framework, narrowing its focus on price stability and confirming that hitting its 2% inflation target is its most important priority. The central bank and the Department of Finance released the BOC’s marching orders for how monetary policy is expected to be set in Canada over the next five years. It’s the first change to the framework under Prime Minister Mark Carney, who led the central bank as governor from 2008 to 2013.
The document reiterates that the central bank’s main focus is keeping the yearly change in the consumer price index at 2%, as was the case in the 2021 agreement. The latest document removes a commitment to “actively seek the maximum sustainable level of employment when conditions warrant,” and also cuts mentions of climate change. The agreement also reiterates that monetary policy will continue to aim for symmetry, meaning “equal emphasis on deviations above and below the target”.
The bank also preserved the notion of flexibility, meaning the bank can use some judgment to return inflation to target during a shock. Inflation is proving sticky right now, and the framework’s emphasis on reaching 2% total inflation “is reading a little more hawkish,” Bank of Montreal economist Shelly Kaushik said. In the document, the bank said that the post Covid-19 surge in inflation was not a failure of the framework, but “a challenge to its implementation amid extraordinary global shocks.” The bank says it has “strengthened its analytical capacity to better assess how global and domestic supply‑side shocks transmit to Canadian inflation, and how policy should respond when such shocks are larger and more persistent than normal.” In an unusual move, the federal government announced the renewal as part of its annual budget without any supporting details.
Typically, a framework renewal is co-released with the central bank along with a suite of documents that outlines public consultations and additional analysis of Canada’s economy and policy tools at the bank’s disposal. Last week, the central bank hiked borrowing costs to 2.5%, the first increase in over three years.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing