Globe Editorial: Does the Bank of Canada Need a New Mission Statement? This is the wrong question


Bank of Canada Governor Tiff Macklem speaks at a press conference in Ottawa on October 27, 2021.Adrian Wyld / The Canadian Press

Thirty years ago, the federal government and the Bank of Canada signed an agreement. The central bank had to focus on one mission: fighting inflation.

Finance ministers and bank governors have repeatedly renewed this inflation control mission at five-year intervals. The last time was in October 2016, when the primary objective of monetary policy was, once again, to achieve inflation at “the 2% midpoint of the inflation control band. from 1 to 3% ”.

But for years economists have questioned whether this singular focus on inflation is the right one – and whether the current mission statement accurately describes the challenges of recession and deflation that have preoccupied central banks over the past decade. of the last fifteen years.

The 2016 accord addressed those concerns by… kicking the box down the road. The bank was instructed to keep the old mission statement, but to “continue to research potential improvements in the monetary policy framework.” The bank and the federal government “would then determine the appropriate framework for the years to come.”

When would this happen? “Before the end of 2021.”

The inflation targeting agreement ends on December 31. Which means that, in the coming days, Finance Minister Chrystia Freeland and Bank of Canada Governor Tiff Macklem are due to issue a new one, covering the next five years.

The institution Mr. Macklem heads has been studying the “renewal of the monetary policy framework” since 2017 – via 23 research papers, 13 speeches, three conferences, round tables and consultations. Refer the old saw to the fact that if you put 10 economists in a room, you will get (at least) 11 opinions.

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Here’s another opinion: The precise wording of the Bank of Canada’s mission statement may not matter. Not if it’s worded flexibly enough. And it’s.

Recent history suggests that what really matters is who runs the bank, how they understand the changing economic challenges and how they approach them. The inflation mandate would have to be changed if it was a constraint. But he doesn’t seem to be. The bank relied on it when it was beneficial, while interpreting it in situations where it was necessary.

As such, we suggest that Ms Freeland and Mr Macklem could be well served by simply photocopying the 2016 agreement. It would be politically safe for a finance minister faced with consumer prices currently above target and to a conservative bench that attacks him obsessively on the subject. It might also raise the fewest questions for Mr Macklem – that’s not a bad thing, given that this twice-decade renegotiation is a time when his otherwise independent institution is least isolated from politics.

The argument for rewriting the mission statement? Let it be a product of the last war – the great inflation battle of the 1970s and 1980s – and not capture all the other threats that keep central bankers from sleeping at night.

The world’s largest central bank, the United States Federal Reserve, has a dual mandate. It is supposed to achieve both “stable prices” and “maximum employment”.

Aiming for “as many jobs as possible” seems to be a very different mission from that of the Bank of Canada. Yet the Fed has long used inflation as an indicator of whether it has reached full employment, and employment levels as an indicator of future inflation. The Bank of Canada does the same, with unemployment and labor market measures used to read future inflation and establish an inflation-targeting monetary policy.

As for deflation, the biggest threat of the past two decades, the Bank of Canada has not been prevented from combating it with new monetary policies, even under the current deal – since deflation is not only too weak economic growth, but inflation that is not high enough.

If we were to change anything in the monetary policy mission statement, it would remove the statement that target inflation should be measured by “the 12 month rate of change” of the price index. for consumption. The bank has long judged inflation by more than a simple CPI; it has also shown a willingness to adjust its policy to inflation over longer periods of time, for example being rightly comfortable with some price catching up this year after last year’s low inflation.

The 2016 agreement appears to be worded broad enough to give the Bank of Canada a clear but flexible goal. Could it be better worded? Yes. Does it have to be? Probably not.

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