Bank of Canada Holds Firm on 2% Inflation Target
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The Bank of Canada plans to keep its 2% inflation target but is examining the best ways to measure core inflation and how to factor housing costs into its monetary policy decisions.
Speaking in Mexico City, Governor Tiff Macklem previewed some of the issues being considered in the coming review of the central bank’s monetary policy framework.
Because interest rates have a direct impact on housing demand, “it’s worth examining how monetary policy affects housing sector dynamics, and how best to factor housing affordability into our focus on overall price stability,” Macklem said in the text of prepared remarks.
The central bank reviews its mandate every five years, with the next one due in 2026.
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Macklem hinted the bank might tweak how it assesses core inflation and has previously indicated that the trim and median core measures will be reviewed.
“With more supply shocks and greater volatility in inflation, what is the best way to measure core inflation?” Macklem said in the remarks, adding that the bank will examine whether it’s better to look at a broad or narrow range of indicators.
(Bloomberg)
The governor also spoke about these issues in a speech in February.
The 2% inflation target, however, isn’t up for debate. The Bank of Canada has used inflation targeting since 1991.
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“Canadians generally understand and support the 2% target. That familiarity has helped anchor inflation expectations through thick and thin, including through the pandemic crisis,” Macklem said.
Headline inflationslowedto a 1.7% annual pace in July. But underlying core measures are closer to 3%, keeping policymakers cautious about cutting rates.
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Macklem’s speech also addressed central bank independence, though he made no mention of U.S. President Donald Trump’s move tofireFederal Reserve Governor Lisa Cook late Aug. 25.
“Hard choices and uncertainty increase the risk of public disappointment, frustration and criticism. That’s why it’s important for central banks to remain independent from the political process,” Macklem said.
“But we can’t hide behind our independence,” he added, saying that the Bank of Canada strives for accountability by holding press conferences after every rate decision and releasing its policy deliberations.
The Bank of Canada next sets interest rates on Sept. 17. It has held the policy rate at 2.75% for the past three meetings.
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