Lessons for the future

In his year-end remarks, Governor Tiff Macklem discusses what the Bank of Canada learned from the pandemic experience and outlines how the Bank is preparing for a more uncertain future.

Reflecting on what we learned

Looking back on the pandemic can help us prepare for the future. The shock to financial markets, the disruption to supply chains and the surge in inflation that followed were all unexpected. We learned a few important things from the experience. For example:

• Our rapid and bold response early in the crisis avoided a worse outcome. But the bar to use extraordinary monetary policy tools—like quantitative easing—must remain high.
• Monetary policy has traditionally focused on demand. Yet supply matters just as much for understanding imbalances in the economy. Going forward, we need better information and analysis on supply issues.
• When inflation is low and stable, businesses hesitate to raise prices. But when their costs are rising and demand is very strong, businesses become more willing to increase prices to keep up with rising costs. Our models and forecasts need to reflect this.

We also relearned just how much people hate high inflation. And even though inflation is now back at target, prices are a lot higher than they were before the pandemic. This has eroded trust in our economic system.

Preparing for an uncertain future

The Bank is preparing for a more uncertain and shock-prone world. We can best protect the economic and financial well-being of Canadians by delivering low and stable inflation. As part of that commitment, we’ve set three priorities for 2025.

First, we will work with our international partners on shared economic issues. Together, we brought inflation down. But an increase in global conflicts and protectionism could reignite the inflation risk. As host of the G7 in 2025, Canada has an opportunity to shape priorities for shared success.

Second, we will improve our analysis. The Bank is investing in richer information and new economic models, and we’ve expanded surveys to reach more Canadian consumers and businesses. These changes will help us better respond to the next economic shock.

Third, we will make sure we have the best possible framework to deliver on our mandate. Every five years, we review our monetary policy framework. The Bank and the federal government then agree on what the framework will be for the next five years. The Bank is currently considering what issues we should focus on in the 2026 review.

Delivering on price stability

Monetary policy has worked to lower inflation and bring it back to our 2% target. But that does not mean the job is done. We now need inflation to stabilize at 2%.

Over the coming months, inflation will be affected by things like a temporary tax holiday on certain goods and services. Economic growth has been weaker than we expected. We need growth and hiring to pick up to keep inflation centred on the 2% target.

Ultimately, low and stable inflation is how the Bank can provide certainty in an uncertain world.