(Bloomberg) — Bank of Canada Governor Tiff Macklem launched the central bank’s review of its framework, but strongly suggested that officials are likely to re-endorse the bank’s current approach to targeting 2% inflation.
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“Now is not the time to question the anchor that has proven so effective in achieving price stability,” Macklem said in a speech in the Toronto area on Friday, marking the first time since 1995 that the bank has closed the door on rethinking the 2% target.
Instead, Macklem said the central bank needs to focus its resources “on the most pressing and important issues” for the framework, including looking at a “richer” playbook for handling supply shocks to the economy.
Importantly, Macklem said the bank would look at whether the central bank’s preferred core inflation gauges — currently the so-called trim and median measures — remain appropriate “in a world with more volatility.” He said the bank will focus on whether it should adopt a “broader” approach to underlying inflation metrics, and examine their robustness.
Macklem also acknowledged that the bank may need to pay more attention to Canada’s housing market as it sets policy, and whether higher shelter price increases are distorting core measures.
“We must consider how monetary policy affects housing demand and supply and how the imbalance between them feeds into inflation in shelter prices,” he said.
The Bank of Canada’s framework is reviewed and renewed periodically, now every half-decade. Each time, officials have re-adopted the 2% inflation targeting approach with relatively minor adjustments. Still, the bank had at least floated alternatives, including price level targeting and nominal GDP targeting, during previous reassessments.
One of the more substantial changes to the framework came during the central bank’s last renewal in 2021, when policymakers added a focus on maximum sustainable employment as a secondary goal after inflation stability was achieved.
Macklem said the pandemic put pressure on the central bank’s framework “like never before,” and the 2% inflation target was effective. “In short, the framework was tested — and it proved resilient,” he said.
The governor also spoke at length about the impact to the Canadian economy from US President Donald Trump’s tariff threats. Macklem added he approves of what he sees as a focus by Canadian policymakers to increase productivity and investment “by strengthening our economic union.”
