(Bloomberg) — Bank of Canada Governor Tiff Macklem underscored that price stability is central to its renewed mandate and indicated that any new flexibility will apply only at times when inflation is low or the economy is weak.
In a speech Wednesday, Macklem provided more insight into the central bank’s new marching orders, which included some leeway to allow inflation to overshoot the central bank’s 2% target. Macklem made it clear that flexibility won’t apply in situations — like now — when inflation is way above target.
“When might conditions warrant? When inflation is close to target, interest rates are at more normal levels,” Macklem said in prepared remarks for a virtual speech before the Empire Club of Canada. Keep inflation low and stable, though, remains the priority and right now the central bank is “focused on our forward guidance — on assessing the diminishing degree of slack in the economy and on bringing inflation sustainably back to target.”
In a mandate renewal released jointly with the Canadian government on Monday, the central bank maintained its 2% inflation target for the next five years, but added a new requirement whereby officials will use their 1% to 3% control range to support employment levels if warranted. The renewal puts more weight on the inflation range than has been the case in past statements and explicitly introduces the need to consider the labor market.
“The government and the bank agreed that because well-anchored inflation expectations are critical to achieving both price stability and maximum sustainable employment, the primary objective of monetary policy is to maintain low and stable inflation over time,” Macklem said
The added flexibility reflects in part efforts to deal with broader structural factors, and challenges associated with major downturns, the central banker said.
For example, the long-term trend of falling global rates gives the central bank less firepower in the event it needs to respond to an economic downturn. In such a situation, giving the economy a dollop of stimulus could require forward guidance — like it’s doing now — that implies the central bank is ready to allow a temporary overshoot of its target.
Another challenge for central bankers going forward is the growing uncertainty around gauging when the nation’s economy has reached full employment. In situations when inflation is at target, the mandate will allow the Bank of Canada to test the limits of the economy even if it could mean a small uptick in price increases, Macklem said.
“As we move beyond this pandemic and the economy normalizes, uncertainty about maximum sustainable employment will persist,” he said. “When conditions warrant, we can probe by being more patient to help us better gauge the level of employment that is consistent with price stability.”
Canada’s top central banker also said the recent mandate review was its most extensive yet as they also polled the public in addition to doing their own internal analysis. On top of flexible inflation targeting, two other models were considered: a dual mandate and average inflation targeting.
“Overall, flexible inflation targeting was the preferred framework,” Macklem said.
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