BoC Framework Review: Announces inflation target to be left at 2% midpoint of 1-3% range for next 5 years

The Bank of Canada announced on Monday that it had agreed with the government to leave its inflation target at the 2.0% midpoint of a 1.0%-3.0% range for the next five year, as expected, according to Reuters. 

Additional Takeaways:

“Will sometimes hold policy rate at a low level for longer than usual to address challenges of structurally low interest rates, will use other tools as well.”

“The bank will use a broad set of monetary policy tools to deal with likelihood bank's policy rate will more often be at its lowest possible rate, given circumstances at the time.”

“Agrees with the government that primary objective of monetary policy is to maintain low, stable inflation over time.”

“Agrees with the government that monetary policy should continue to support maximum sustainable employment while recognizing this is not directly measurable and is determined largely by non-monetary factors.”

“Neutral interest rates are likely to be lower than in the past, which means central banks will have less room to lower policy rates in case of shocks.”

“Evolving forces are having major effects on the Canadian labor market, increasing uncertainty about the level of maximum sustainable employment.”

“The bank will continue to use the flexibility of 1-3% control range to actively seek the maximum sustainable level of employment when conditions warrant.”

“The bank will use the flexibility of the 1 to 3% range only to the extent that it is consistent with keeping medium-term inflation expectations well anchored at 2%.”

“The bank will explain when it is using flexibility in the framework.”

“Because monetary policy can exacerbate financial vulnerabilities, the bank will continue to be mindful that such vulnerabilities can lead to worse outcomes down the road.”

“Strong and inclusive labor market helps reduce income inequality and supports robust demand for goods and services.”

“The bank will consider a broad range of labor market indicators and systematically report to Canadians how labor market outcomes have factored into policy decisions.”

“The government will work with relevant agencies to ensure arrangements for financial regulation and supervision are fit for purpose and consider changes if and where appropriate.”

Market Reaction

There has not been a notable market reaction to the announcement, which did not come as a surprise.