© Reuters. FILE PHOTO: Bank of Canada Governor Tiff Macklem takes part in an event at the Bank of Canada in Ottawa, Canada, October 7, 2021. REUTERS/Blair Gable
By Steve Scherer and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada on Monday unveiled an agreement with the federal government to keep its inflation target unchanged at 2% and said it could maintain interest rates lower for longer if needed to help keep employment at optimal levels.
The decision was set out in a new five-year monetary policy framework between the central bank and the finance ministry that takes effect on Jan. 1. The inflation target has been set at the 2% midpoint of a 1%-3% control range for the last 30 years.
“Maintaining a stable environment for the prices Canadians pay is the paramount objective for Canada’s monetary policy,” Finance Minister Chrystia Freeland said in a news conference.
“This is about continuity, and about continuing to do what we know works.”
The central bank and the ministry decided against a major shift in monetary policy strategy similar to the one adopted by the Federal Reserve last year. Reuters reported the details https://www.reuters.com/markets/us/exclusive-bank-canada-policy-framework-leave-inflation-target-unchanged-source-2021-12-09 of the announcement last week.
The Bank of Canada slashed its key interest rate to a record low of 0.25% last year and says it could start hiking it as soon as next April as the economy recovers from the COVID-19 pandemic. Annual inflation hit an 18-year high of 4.7% in October.
The central bank said major forces, such as demographics and technological change, were having profound effects on the labor market and making it harder to judge maximum sustainable employment – the level beyond which inflationary pressures arise.
It said it would use the flexibility of the 1%-3% target range to seek maximum sustainable employment when conditions warranted and also deal with structurally low rates, “including sometimes holding its policy interest at a low level for longer than usual.”
‘LARGELY A CONTINUATION’
Analysts noted the bank has taken a flexible approach to cope with the disruptions caused by the pandemic, allowing the labor market and the economy to rebound while supply-chain bottlenecks and rising energy prices pushed up overall costs.
“This is largely a continuation of what they are already doing, in a sense codifying the approach that the bank has been taking during the pandemic,” said Josh Nye, senior economist at RBC Economics.
“It’s not going to change our forecasts for when the Bank of Canada begins to raise interest rates.”
Bank of Canada Governor Tiff Macklem said the central bank was focused on bringing inflation back down to target without choking off the economic recovery.
Doug Porter, chief economist at BMO Capital Markets, said the main message was that the Bank of Canada retained the right to use a lot of flexibility in setting rates.
“When the economy’s under stress, we could have rates low for very long stretches,” he said.
The Bank of Canada, however, acknowledged that maximum sustainable employment is not directly measurable and is determined largely by non-monetary factors that can change through time.
It said neutral interest rates were likely to be lower than in the past, which meant central banks would have less room to cut rates when faced with economic shocks.
Source: Investing.com