Bank of Canada inflation mandate stays at 2 per cent, turns its eye to employment

The federal government is leaving the Bank of Canada’s inflation mandate at 2 per cent amid a rising cost of living and uncertainty of the new Omicron COVID-19 variant.

The mandate is reviewed every five years and the inflation target has been between one and three per cent since 1991. The Bank of Canada says it will use the flexibility of a range of between one and three per cent as conditions warrant.

Benjamin Reitzes, director of Canadian rates & macro strategist at BMO, says this changes little in the near term but the language signals a more dovish lean.

"For markets, the takeaway is that the BoC will be more tolerant of inflation inside the one per cent to 3 per cent band, rather than always focusing on 2 per cent, as long as inflation expectations are anchored," said Reitzes.

"That will enable them to keep policy easier for longer if the labour market warrants it."

The announcement comes less than a week after the Bank of Canada announced it would leave its benchmark interest rate unchanged, while dropping the word temporary when referring to forces driving inflation.

It also comes on the heels of inflation rising 4.7 per cent on a year-over-year basis in October, the fastest pace since 2003.

The next round of inflation data comes out on Wednesday.

Focus on employment

The Bank of Canada also updated its language around employment in Monday's announcement.

"The Government and the Bank also agree that monetary policy should continue to support maximum sustainable employment, recognizing that maximum sustainable employment is not directly measurable and is determined largely by non-monetary factors that can change through time," it said in a release.

"Recognizing the limits of monetary policy, the Government and the Bank also acknowledge their joint responsibility for achieving the inflation target and promoting maximum sustainable employment."

Reitzes says this is "perhaps a sign that the government recognizes it's time to stand down a bit on fiscal stimulus."

Income inequality and climate change

The central bank also addressed income inequality.

"The Government and the Bank acknowledge that a low interest rate environment can be more prone to financial imbalances. In this context, the Government will continue to work with all relevant federal agencies to ensure that Canadian arrangements for financial regulation and supervision are fit-for-purpose and consider changes if and where appropriate," it said.

It also says it will keep a closer eye on climate change.

"While monetary policy cannot directly tackle the threats posed by climate change, the Bank will develop the modelling tools needed to take into account the important implications of climate change on the Canadian economy and financial system," said the Bank of Canada.

Finance Minister Chrystia Freeland will hold a joint news conference with Governor Tiff Macklem later this morning.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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