Chrystia Freeland to announce Bank of Canada’s renewed mandate on Monday

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Finance Minister Chrystia Freeland will announce the Bank of Canada’s new mandate on Monday in a long-awaited decision that is expected to keep the central bank’s inflation target at 2 per cent while adding new language about how it should factor in employment when setting interest rates.

The federal government renews the bank’s inflation targeting framework every five years, giving it a rare opportunity to weigh in on the overall direction of monetary policy. The Bank of Canada conducts monetary policy on a day-to-day basis independent from the government. Since the mid-1990s, it has been tasked with keeping inflation at about 2 per cent, within a 1 per cent to 3 per cent range.

The closely watched decision comes at a delicate moment for the central bank. The annual rate of inflation hit an 18-year high of 4.7 per cent in October, and the rising cost of living has become a major political issue, debated daily in the House of Commons.

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

The Bank of Canada has been considering alternatives to its existing flexible inflation targeting system. Leading options include a dual mandate, under which the bank would aim for both full employment and price stability; and an average inflation targeting system, which would seek to average the rate of inflation over time, aiming for higher inflation after periods of slow growth in consumer prices.

Bank of Canada holds on interest rates, still sees hikes in middle quarters of next year

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

The U.S. Federal Reserve has had a dual mandate since the 1970s, and introduced a form of average inflation targeting when it updated its mandate last year.

The reported tweak for the Bank of Canada appears to stop short of introducing a full dual mandate. Bank of Montreal chief economist Douglas Porter wrote in a note to clients that the reported change “sounds very close to what consensus was expecting and is really no different from current practices.”

“Perhaps most importantly ... it appears the bank has decided to not follow the Fed’s lead on inflation averaging. After all, with U.S. core inflation now tracking well above 2 per cent on a five-year basis, the Fed should already be pulling the tightening lever even under their new supposed milder targeting regime,” he wrote.

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 the bank’s 2 per cent inflation target cannot be sustainably achieved without full employment.

The bank has also been analyzing a broader range of labour market indicators than usual throughout the pandemic. 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 mandate to target inflation.

The mandate renewal comes at the same time the bank is reassessing its monetary policy stand in the face of persistently high inflation. The bank has maintained ultralow interest rates since early in the pandemic, and is now having to tighten policy faster than previously expected, ending its program of buying government bonds in October, and signaling rate hikes next year.

The bank on Wednesday kept the overnight rate at 0.25 per cent, while reiterating that it expects to begin increasing it in the middle quarters of next year. Analysts widely expect the bank to start in April, and financial markets have priced in five rate hikes next year.

Ms. Freeland and Mr. Macklem will hold a joint press conference on Monday morning.

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