Chrystia Freeland expected to renew Bank of Canada’s 2 per cent inflation target

Economists expect Finance Minister Chrystia Freeland to renew the Bank of Canada’s mandate of aiming its monetary policy at keeping inflation around 2 per cent, and to add new guidance to consider employment levels when it makes its decisions, but stop short of a dual mandate.

The federal government and the central bank renew their policy framework and the inflation target every five years, and will announce the latest iteration in the coming days. This gives the government a rare opportunity to weigh in on the overall direction of the Bank of Canada, which conducts monetary policy on a day-to-day basis independent from government.

A dual mandate is a system that aims to achieve both price stability and maximum employment.

Economist Armine Yalnizyan, who is the Atkinson Fellow on the Future of Workers and a member of a federal task force on women in the economy, said she expects the minister will add employment-focused language to the mandate, but stop short of including specific employment targets. She said the more dramatic shift to a dual mandate is unnecessary, because labour statistics are already factored into monetary policy decisions.

“I think that central banks around the world are all operating as if they have dual mandates right now,” she said.

Mandate renewals are typically rubber-stamp affairs, with the government accepting the central bank’s recommendation. The bank’s current monetary policy targets 2 per cent inflation within a range of 1 to 3 per cent. This time, there has been more public consultation and political debate about what should be included in the mandate.

Reuters and Bloomberg reported on Thursday, each citing a source, that the government will maintain the 2 per cent target but add new language related to employment. Ms. Freeland’s office and the Bank of Canada declined comment on the reports when contacted by The Globe and Mail.

“It seems clear there’s going to be a change,” said Jean-François Perrault, chief economist with Bank of Nova Scotia. But he said he would advise against any major shifts, given the political battles over inflation in the House of Commons.

“I think it’s kind of risky to change it in the current environment where there already is a sense, certainly [among] politicians, that the Bank of Canada has been unduly influenced or has been politicized by the current government. I don’t agree with that at all. But there is a perception,” he said. “A change in the mandate risks feeding that narrative to some extent.”

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The renewal comes at a fraught moment for the Bank of Canada. Inflation has been running above the bank’s target range for the past seven months, hitting a near two-decade high of 4.7 per cent in October.

High inflation has become a top political issue in a way not seen since the 1980s. The federal Conservatives have hammered the government for weeks on rising consumer prices, and Conservative finance critic Pierre Poilievre has questioned the independence of the central bank, calling it an “ATM” printing money to finance government spending.

Conservative Leader Erin O’Toole led off question period on Thursday by accusing the Liberal government of “ignoring the inflation crisis” facing Canadians. He also noted that some economists are expressing concern that the minister will change the bank’s mandate.

Randy Boissonnault, the Liberal government’s associate finance minister, referenced the imminent renewal in his response.

“The bank has undertaken an extensive process on this matter,” he said. “There have been good conversations between the government and the Bank of Canada and we look forward to announcing the results of that review in due course.”

The central bank’s monetary policy framework outlines its core aims – the economic outcomes it is trying to achieve when it adjusts interest rates or alters the money supply. Since the early 1990s, the federal government has given the bank one goal: achieving low, stable and predictable inflation as a way to stabilize the value of money. Other central banks have additional goals, like achieving full employment in the economy.

The Bank of Canada has already been putting more emphasis on labour markets since the beginning of the pandemic. Bank governor Tiff Macklem has emphasized the importance of an “inclusive” jobs recovery, and said that the bank’s 2 per cent inflation target cannot be sustainably achieved without full employment.

During the economic disruption of the pandemic, the bank began analyzing a broader range of labour market indicators. Alongside the rate of employment and unemployment, the bank is tracking data such as labour market inclusion by age, gender and education.

Mr. Macklem has maintained that the bank’s recent focus on employment is consistent with its existing inflation targeting mandate. While the overarching goal of the current regime is inflation control, the bank also considers real economic variables, such as GDP and employment, when deciding whether the economy is on track to hit the inflation target.

Adding some employment language to the mandate would not necessarily entail a shift towards a dual mandate. The U.S. Federal Reserve has had a dual mandate since the 1970s, and New Zealand – the first central bank in the world to adopt inflation targeting in 1990 – adopted a dual mandate in 2018.

Ahead of the mandate renewal, the bank conducted an extensive research campaign on whether other monetary policy models could do a better job than inflation targeting. The dual mandate emerged as one of two leading alternatives, and surveys conducted on behalf of the bank showed Canadians were amenable to the change.

University of British Columbia economics professor Kevin Milligan, who recently served as a special adviser to the federal government on economic recovery matters during the height of the pandemic, said he believes broadening the language of the mandate would be a positive move with practical consequences.

He said highlighting specific issues could influence internal bank decisions about how to focus their research over the next five years.

“I think it actually can matter because it will provide guidance to the career staff about what things the government views, and the bank leadership views, is important,” he said.

Plenty of economists say the government should maintain the status quo. Former Bank of Canada governor David Dodge, who retired from the position in 2008 after a seven-year term, said the existing mandate is clear and should not be changed.

“And I feel more strongly now that is the right option than I did when I was governor,” he told The Globe in an interview.

Mr. Dodge said his advice would be to avoid moving toward a dual mandate that features both an inflation target and an employment target.

“That’s what gets us into trouble,” he said, warning that focusing on employment risks repeating the periods of high inflation of the 1960s and 1970s.

The option of some form of middle ground, where the minister maintains the single inflation target but adds a requirement for the bank to consider additional factors such as employment was dismissed as “puffery” by Mr. Dodge, who is now a senior adviser with Bennett Jones.

“If that makes somebody feel good then that’s fine,” he said. “I mean, you can add all sorts of ‘blah blah’ if you want. I think it’s always bad to add ‘blah blah.’ I don’t think it’s very helpful to anybody.”

Andrew Kelvin, chief Canada strategist with Toronto-Dominion Bank, said in a note to clients that a middle of the road option that emphasized employment without putting an exact target on employment would likely be the best route.

“Specifying that the bank will take labour market conditions into account (perhaps as an operational guide) when assessing policy will allow [the bank’s] governing council to incorporate a richer set of variables into its monetary policy decisions, ultimately giving the BoC more flexibility in how it chooses to achieve its primary goal of controlling inflation,” he said.

He added that a tweak to the mandate is unlikely to impact the short-term path of monetary policy. The bank has signalled that it will start raising rates in the middle quarters of next year. Analysts widely expect rate hikes to begin in April.

“The bank has likely known the form and substance of the mandate renewal for some time now, and as such we expect the new mandate is already embedded in the current forward guidance,” Mr. Kelvin wrote.

With a report from David Parkinson

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