Governor Tiff Macklem speaks about the Bank of Canada’s monetary policy framework review and the agreement between the Government of Canada and the Bank to renew the 2 percent inflation target.

Watch Governor Macklem speak to the Empire Club of Canada by webcast. Read the full speech.

Inflation targeting has served us well

Canada’s flexible inflation-targeting framework has delivered low, stable and predictable inflation for decades. It has been adaptable and resilient through economic change and crises such as the COVID‑19 pandemic. This has allowed households and businesses to better plan for their future. It has also protected those with lower or fixed incomes from losing their purchasing power. And Canadians have benefited from lower average unemployment rates.

Reviewing and renewing the framework

Every five years, the Bank and the Government look back at how well the framework has served Canadians. We study the current economic situation. And we consider whether any changes might better promote Canada’s economic and financial welfare.

This process is important because:

• it gives the agreement democratic legitimacy
• it provides the Bank with clear guidelines and the operational independence to do our work
• it allows Canadians to hold the Bank accountable for meeting the agreement’s monetary policy objectives

For this renewal, the Bank carefully considered how to best address two primary challenges facing monetary policy today:

• low global neutral interest rates—meaning central banks have less room to lower their policy interest rate when facing large negative shocks, so they have to use other monetary policy tools more often
• labour market uncertainties—meaning structural changes like shifting demographics, digitalization, globalization and the evolving nature of work have had major impacts on Canada’s job market

Comparing the alternatives

This time, we ran a “horse race” to weigh the pros and cons of our current flexible inflation-targeting regime against several alternatives:

• average inflation targeting
• a dual mandate that targets both inflation and employment
• targeting nominal gross domestic product—both its level and its growth
• price-level targeting

We also engaged in extensive consultations with Canadians. We heard that low, stable and predictable inflation is important. We also heard that employment and labour market considerations should play a role in monetary policy—as they currently do. The economy has to be at full employment for inflation to reach its target and stay there.

In our economic modelling, simulations and public consultations, flexible inflation targeting proved hard to beat—in theory and in practice.

Our renewed agreement

In the end, the Government and the Bank agreed that the best contribution monetary policy can make to the well-being of Canadians is to continue to focus on price stability.

Under the 2022–26 agreement, the cornerstone of our framework remains the 2 percent inflation target inside a control range of 1 to 3 percent. The agreement notes that we will continue to use the flexibility of the framework to actively seek maximum sustainable employment—that is, the highest level of employment we can achieve without triggering a rise in inflation.

The primary objective of monetary policy is to maintain low and stable inflation over time. We will be clear about how we will continue to use the flexibility of the framework and our extended monetary policy tools, when circumstances warrant, to respond to changes in our domestic and global economy.

Watch Governor Macklem answer questions from the media following his speech.