Bank of Canada keeps its 2% inflation target, while adding job market to mandate

The central bank keeps its 2% inflation target for the next five years. However, it’s been given an official right to overshoot it slightly in order to “support maximum sustainable employment.”

On Monday, the Bank of Canada released a new mandate jointly with the Canadian government. It added a new requirement according to which officials will use its 1-3% target range to keep supporting employment levels, while pointed to the primacy of targeting inflation issue.

The renewal pays more attention to the inflation range than in case of the previous statements and shows directly the need to consider the labor market conditions. At the same time, officials made it clear the job market is less important for monetary policy than price stability.

According to the government and the BoC, “monetary policy has to keep supporting maximum sustainable employment, although it can’t be directly measurable as it’s determined mostly by non-monetary factors that can change in time.”

The statement coincides with economists’ forecasts – a formalization of what was already clear in the Bank’s previous mandates. Although the BoC had studied the advantages of a significant review of the mandate, any arguments in favor of a large change were shaken by the recent inflation growth.

As you know, the Canadian inflation has been exceeding the Bank’s upper limit for seven months already. It has reached a 20 years high level of 4.7%.

The Bank of Canada has been focusing on prices stabilization since the 1990s. The main goal was to keep inflation within a range of 1-3%. It meant aiming for 2% for the nearest future of two next years.

The latest statement showed certain details on how the new mandate would work: it plans to use flexibility of the range, when it’s necessary, and officials promise more transparency in how exactly they will do it. The central bank will explain when it is using the flexibility and will report on how labor market performance affected the decisions.

In addition to it, the statement pointed that the Canadian government shares responsibility for reaching the target inflation and maximum sustainable employment.

The statement also admitted that low rates can intensify financial imbalances, with the government promising to work with federal agencies to cope with the risks if it’s necessary.

According to CIBC economist Benjamin Tal, the BoC needs to be very careful with raising rates, otherwise it risks killing the real estate market and pushing Canada’s economy into recession.

RBC economists didn’t change their forecast for three rate increases next year with the first one in April.