Bank of Canada and Ottawa renew inflation target deal at two per cent

OTTAWA – The Bank of Canada and the federal government said Monday they have renewed their inflation target agreement for another five years in an effort to foster price stability and sustainable economic growth.

The target will continue to be two per cent — the midpoint of a range of one per cent to three per cent that the central bank deems acceptable.

The central bank and the government said low and stable inflation has helped underpin the Canadian economy and preserve confidence in the value of money.

“Controlling the pace of inflation at a steady and low level protects the purchasing power of all Canadians and helps sustain growth and job creation,” Finance Minister Bill Morneau said in a statement.

Later Monday, Bank of Canada governor Stephen Poloz said the agreement shows that Ottawa supports “low, stable and predictable inflation,” while also giving the bank the space it needs to independently pursue this goal as it sees fit.

“It’s a framework that has worked extraordinarily well for 25 years and, after looking at all the evidence, we could find no compelling reason to change it,” Poloz said during an appearance before the House of Commons finance committee.

The Bank of Canada uses the inflation target when determining monetary policy and setting its key overnight interest rate.

Canada started using an inflation target to guide monetary policy in 1991 and has kept the target set at two per cent since 1995.

Since then, inflation, as measured by the consumer price index, has averaged close to two per cent and only stepped outside the one to three per cent range for short periods. The bank and government said inflation has also been less volatile during that time.

CIBC economist Royce Mendes suggested that there had been some speculation that the Bank of Canada would increase the inflation target.

“However, the costs of such a change, and the uncertainties associated with being the first major central bank to do so, appear to have outweighed the benefits of such,” Mendes wrote in a report.

“That said, the bank will continue to research potential improvements to the monetary policy framework in the years ahead given the constraints central banks are currently facing.”

While the Bank of Canada and the government agreed to keep the inflation target unchanged, the central bank said it would stop using its current preferred measure of core inflation.

The bank’s current measure of core inflation excludes eight of the most volatile components of the consumer price index and the effect of indirect tax changes on the remaining components.

Instead, the Bank of Canada will use three new measures that each look to measure core inflation in a different way in an effort to manage the risks associated with the shortcomings of any one indicator.

The agreement is set to expire Dec. 31, 2021.