As had been widely expected, the federal government in Ottawa has renewed the Bank of Canada’s 2% inflation target for another five years but has given the central bank license to moderately overshoot that target to “support maximum sustainable employment.”
In a formal mandate renewal event, the federal government directed the Bank of Canada to use monetary policy to boost employment levels as long as those efforts don’t jeopardize the broader objective of stable consumer prices.
The modification gives the Bank of Canada Governor more latitude to keep interest rates lower than what they would have been had the focus remained squarely on the inflation target. However, the central bank insists that the new mandate and language only formalizes what was already an implicit part of recent Bank of Canada policy.
The Canadian dollar extended declines after the inflation target was renewed, trading down 0.7% at $1.2807 per U.S. dollar. Yields on Canadian government two-year bonds fell five basis points to 0.919%.
Since the 1990s, the Bank of Canada has been narrowly focused on a single objective: to keep prices stable. The goal has been to keep inflation within a range of 1% to 3% as much as possible. Operationally, that’s meant aiming for a 2% target over a two-year forecast horizon.
Economists saw no real changes in the new mandate, though some criticized the government for unnecessarily introducing uncertainty into the Bank of Canada’s mandate.
