Renewing Canada’s monetary policy framework

Every five years, the Bank of Canada and the Government of Canada review and renew the agreement on Canada’s monetary policy framework. Our review is underway, and the framework will be renewed in 2026 for a five-year period.

Building on success

For 25 years leading up to the COVID-19 pandemic, flexible inflation targeting has delivered low, stable and predictable inflation. The pandemic tested the framework like never before. Canada’s economy faced major shocks to both demand and supply, a deep recession and a rapid rebound. As the economy reopened, inflation rose sharply, hitting 8%. Guided by the framework, the Bank raised its policy interest rate forcefully to bring inflation back down to the 2% target.

The framework was tested—and it proved resilient. The measure of its success is not only whether inflation is close to 2%. It’s also how the framework performs in the face of shocks.

The periodic renewal of the monetary policy framework is an opportunity to review its performance, reflect on what is working well and what could be improved.

Monetary policy in a more volatile world

Under the current agreement, the cornerstone of our framework is an inflation target of 2% within a range of 1% to 3%. In past renewals since 1995, this framework has been found to be the best approach for maintaining price stability.

Looking forward, Canada’s economy faces an increasingly volatile, shock-prone world:

• Ongoing structural forces such as deglobalization, digitalization, decarbonization and demographic shifts are making our economy more vulnerable to economic volatility, both domestically and from abroad.
• Supply shocks, including trade conflicts, supply chain disruptions and extreme weather events, are becoming more frequent.
• Canada also has a structural supply challenge in its housing market. For years, the supply of housing has not kept up with demand, and housing affordability has deteriorated.

These trends all have implications for monetary policy. They may put more upward pressure on inflation. And a more shock-prone world likely means more volatility in inflation.

Our focus in this review cycle will be how we can best use our framework to address these trends. We will consider several questions:

• Considering the impact of ongoing structural forces on our economy and the likelihood of more supply shocks on the horizon, do we need a richer playbook for monetary policy to keep inflation on target?
• In a world more prone to volatility, how should we measure underlying inflation? No single measure of core inflation works for all circumstances. What measures are most robust to structural change? Does persistently high inflation in shelter prices distort measures of underlying inflation?
• Housing affordability is a major concern for Canadians, and rising housing costs feed inflation. But monetary policy cannot directly increase the housing supply. How does monetary policy affect housing demand and supply, and how does the imbalance between them affect inflation in shelter prices?

Our approach

The renewal process gives the Bank an opportunity to reflect on what’s working well and where we can consider improvements.

• Our researchers will explore several economic questions to support the Bank and the Government of Canada’s agreement on the monetary policy framework.
• The renewal gives the Bank a chance to consult with Canadians—to listen to the questions and perspectives of our stakeholders and people across the country.
• We will update Canadians on our analysis regularly over the next two years.

Toward the end of 2026, we will publish a background document summarizing our research and what we heard in consultations, along with the renewed agreement on the monetary policy framework.

Speeches