The wording of the Bank of Canada’s new mandate has changed but the substance of it remains essentially the same, several economists say.
Canadians can expect the country’s central bank to continue to aim for low, stable and predictable inflation. And when it comes to the impact of low interest rates on the housing market, it will be up to the government — not monetary policy — to get a handle on runaway home prices.
In a joint press conference on Monday, Finance Minister Chrystia Freeland and Bank of Canada governor Tiff Macklem announced the details of the new five-year mandate, the compass that will guide the central bank’s monetary policy decisions until the end of 2026. While the Bank of Canada makes monetary policy decisions independently, every five years the federal government gets a say in the overall framework under which the bank operates.
According to the new mandate, the “primary objective” of the Bank of Canada will continue to be to pursue an inflation target of two per cent, as it has done since 1991.
The new framework also instructs the central bank to put new emphasis on the labour market when weighing how its policy options. But the new twist won’t change much in practice, according to economists interviewed by Global News.
That’s because the new mandate stops short of making full employment a second target for the Bank of Canada as it is for U.S. Federal Reserve. Economists define full employment as an ideal labour market in which everyone who wants to work can find a job.
“This is really a repackaging of the existing mandate for the Bank of Canada in a new candy wrapper,” says Avery Shenfeld, chief economist at CIBC.
The Bank of Canada’s approach to the housing market, where prices are affected by the cost of borrowing, will also remain the same, according to the documents backing the decision.
Canada already aiming for full employment, economist says
Aiming for full employment was already “inherent” to the central bank’s approach to policymaking, Shenfeld adds.
And the new mandate stops short of defining what full employment is, says Chris Ragan, director of the Max Bell School of Public Policy at McGill’s University.
Ragan, along with other economists commenting on the new mandate on Twitter, expressed relief over the decision not to formally add full employment as a second target for the central bank.
“People like me who think the central bank shouldn’t have a dual mandate argue that the central bank already cares about things like employment and unemployment and the output gap and real GDP growth,” he says.
“But the only thing (the Bank of Canada) can really influence in a sustained way is inflation,” he adds. “So set the target up as inflation.”
To manage inflation, the Bank of Canada adjusts its trend-setting interest rate, which affects the general level of interest rates in the economy. When interest rates go up, it becomes more expensive for individuals and businesses to borrow, which usually cools off economic activity and slows down inflation. Lowering interest rates, on the other hand, tends to stimulate economic activity and put upward pressure on inflation.
The central bank may, in certain instances, have to hold its key interest rate “at a low level for longer than usual,” according to the documents.
But the way the Bank of Canada was targeting inflation — at two per cent within a range of one and three per cent — was already explicitly flexible, Shenfeld notes.
“They weren’t trying to steer inflation every minute of the day to two per cent, but rather get the economy to a fully employed position where we could have, on average, two per cent inflation,” he adds.
The mandate renewal documents also mention the Bank of Canada “systematically” reporting to Canadians about how labour market impacts factor into its monetary policy decisions.
That likely means the Bank of Canada governor will have to spend more time talking about how variables like employment, unemployment and vacancy rates influenced its thinking when making their appearance on Parliament Hill, Ragan says.
“I think that’s actually a good thing,” he says. “The more the bank can communicate … the underlying logic of its policy actions to the Canadian people (the better).”
What about the housing market?
If the brainstorming behind the new mandate led to a new emphasis on the job market, it did not include new thinking on the housing market.
Canada has seen a record spike in home price appreciation during the pandemic, with the national average home prices up 18 per cent in October compared with the same month in 2020, according to data from the Canada Real Estate Association (CREA).
Persistently low interest rates contribute to a hot housing market by making it cheap to carry a mortgage, which also drives up household debt levels.
“A prolonged period of low interest rates could contribute to a buildup of financial vulnerabilities,” reads the 74-page report that backs the Bank of Canada’s new mandate.
The value of Canada’s household debt now exceeds that of the country’s GDP, and its relative size has doubled since 1990, according to the document.
Still, government policies are “better suited” than monetary policy to addressing those vulnerabilities, the document reads.
“There are some problems created by (having) very low interest rates for long and rising house prices is one of them,” Ragan says. “But there are also benefits created from those low interest rates, which is to support that demand.”
“We haven’t figured out how to solve rising house prices,” he adds, “but I would be the first to argue that it’s not really monetary policy problem to do that.”