Thirty years ago, the federal government and the Bank of Canada signed an agreement. The central bank was to focus on one mission: Fighting inflation.
Finance ministers and governors of the bank have repeatedly renewed that inflation-control mission, at five-year intervals. The last time was October of 2016, when the primary aim of monetary policy was, once again, spelled out as achieving inflation at “the 2 per cent midpoint of the 1 to 3 per cent inflation-control range.”
But for years, economists have questioned whether this singular focus on inflation is the right one – and whether the current mission statement accurately describes the challenges of recession and deflation that have preoccupied central banks over the past decade and a half.
The 2016 agreement addressed those concerns by … kicking the can down the road. The bank was instructed to keep the old mission statement, but to “continue its research into potential improvements in the monetary policy framework.” The bank and the feds would thereafter “determine the appropriate framework for the years ahead.”
When would that happen? “Before the end of 2021.”
The inflation-targeting agreement ends on Dec. 31. Which means that, in the coming days, Finance Minister Chrystia Freeland and Bank of Canada Governor Tiff Macklem must issue a new one, covering the next five years.
The institution Mr. Macklem heads has been studying “renewing the monetary policy framework” since 2017 – via 23 research papers, 13 speeches, three conferences, roundtables and consultations. Cue the old saw about how if you put 10 economists in a room, you’ll get (at least) 11 opinions.
Here’s one more opinion: The precise wording of the Bank of Canada’s mission statement may not matter. Not if it’s worded flexibly enough. And it is.
Recent history suggests that what really matters is who leads the bank, how they understand the evolving economic challenges, and how they address them. The inflation mandate would have to be changed if it were a constraint. But it doesn’t appear to be. The bank has leaned on it when beneficial, while interpreting it in situations where that’s what was called for.
As such, we’d suggest that Ms. Freeland and Mr. Macklem might be well served by simply photocopying the 2016 agreement. That would be politically safe for a Finance Minister facing consumer prices currently running above target, and a Conservative front bench obsessively attacking her on the subject. It might also raise the fewest questions for Mr. Macklem – not a bad thing, given that this twice-a-decade renegotiation is a moment when his otherwise independent institution is least insulated from politics.
The argument in favour of rewriting the mission statement? That it’s a product of the last war – the Great Inflation Battle of the 1970s and 80s – and doesn’t capture all the other threats keeping central bankers up at night.
The world’s leading central bank, the United States Federal Reserve, has a so-called dual mandate. It’s supposed to achieve both “stable prices” and “maximum employment.”
Aiming for “maximum employment” sounds like a very different mission than the Bank of Canada’s. Yet the Fed has long used inflation as a gauge of whether it has achieved full employment, and employment levels as a gauge of future inflation. The Bank of Canada does likewise, with joblessness and labour market metrics used for reading future inflation, and setting inflation-targeting monetary policy.
As for deflation, the biggest threat of the past two decades, the Bank of Canada was not prevented from fighting it with novel monetary policies, even under the current agreement – since deflation isn’t just economic growth that’s too low, but inflation that’s not high enough.
If we were to change anything about the monetary policy mission statement, it would be to strike the statement that target inflation is to be measured by “the 12-month rate of change” in the consumer price index. The bank has long judged inflation by more than simple CPI; it has also been willing to tailor policy to inflation over longer periods, such as being rightly comfortable with some price catch-up this year after last year’s low inflation.
The 2016 agreement appears to be worded broadly enough to give the Bank of Canada a target that is clear yet flexible. Could it be better worded? Yes. Does it need to be? Probably not.
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