Every five years, the Bank of Canada and the Government of Canada review and renew our agreement on Canada’s monetary policy framework. In 2021, we renewed Canada’s flexible inflation-targeting framework for 2022 to 2026.
Building on success
Flexible inflation targeting has consistently delivered low, stable and predictable inflation. It’s led to a more stable economy where households and companies can make better spending and investment decisions. And it’s helped Canada see sustained growth in the economy, jobs and productivity. That’s helped raise everyone’s standard of living.
What’s different this time?
Under the 2022–26 agreement, the cornerstone of our framework remains an inflation target of 2 percent inside a control range of 1 to 3 percent.
But we’ve seen some important shifts in the economy recently.
- Interest rates around the world are lower than in the past. And they’ll likely stay low in the future. This means we will have less room to lower our policy interest rate when we need to.
- An aging population, technological change, globalization and shifts in the nature of work have all had major impacts on Canada’s job market.
The renewed agreement lays out how the Bank will continue to use the flexibility built into our framework to respond to these changes.
- It explains how we have and will use an extended set of monetary policy tools when circumstances warrant.
- It outlines how we will consider a broader range of labour market indicators to actively seek the level of maximum sustainable employment needed to keep inflation on target.
The renewed monetary policy agreement provides continuity and clarity, and strengthens the framework to reflect the realities of the world we live in. And it will continue to support the Bank’s primary objective of keeping inflation low and stable over time.
Comparing the alternatives
Every time we renew the agreement, we look carefully to see whether the existing framework is the best way we can promote Canada’s economic and financial welfare. This time, we ran a “horse race” of key alternatives to inflation targeting. We used a combination of economic models, lab experiments and public consultations to weigh the pros and cons of:
- average inflation targeting
- a dual mandate that targets both inflation and employment
- targeting nominal gross domestic product—both its level and growth
- price-level targeting
In the end, no alternative was better than flexible inflation targeting. But we learned important lessons from the other approaches. We built those lessons into the way we will conduct monetary policy.