The Bank of Canada should keep its flexible inflation targeting mandate amid a climate of trade policy uncertainty, instead of pivoting to a dual mandate that promotes price stability alongside maximum employment, a new report from C.D. Howe Institute says.
Every five years, Canada’s central bank and its government review and renew the agreement relating to the nation’s monetary policy framework. The agreement is scheduled to be renewed in 2026, according to the Bank of Canada, which notes the flexible inflation targeting mandate has delivered stable and predictable inflation for 25 years leading up to the COVID-19 pandemic.
The C.D. Howe Institute released its report Tuesday, authored by economists Jeremy Kronick, Steve Ambler, and Thorsten Koeppl. The authors argue that past success of the Bank of Canada’s current mandate make it a better option compared to a dual mandate, which includes targeting maximum employment.
“In the run-up to the Bank of Canada and the federal government’s renewal, the argument for the Bank to take on a mandate of both low and stable inflation, and maximum output and employment has gained traction – especially as we face a world with more supply shocks like tariffs,” Kronick said in a press release Tuesday.
“However, the success of Canadian monetary policy over the last three decades is undeniable, and one would be hard-pressed to justify moving off of a renewal focused on ‘low and stable inflation.’”
During the previous three decades, the report says the central bank largely achieved its stated goals related to price stability, arguing that the most recent period of high inflation reinforces the central bank’s current mandate.
“It was the anchoring of inflation expectations at two percent that allowed us to bring inflation back to target as quickly as we did and without a recession. In the current climate of uncertainty surrounding trade policy, a monetary policy focused on price stability is the best contribution it can make to facilitate the structural adjustments this may bring,” the report said.
The report argues that a dual mandate is commonly understood as achieving maximum sustainable output or employment alongside stabilizing inflation. However, the authors said these are “hypothetical concepts” that are not observable and change over time.
“Estimating this is equivalent to estimating a moving target, meaning the central bank will never know for certain whether it has attained the maximum sustainable level of employment or output because shocks are constantly hitting the economy,” Koeppl said in the press release.
In contrast to the Bank of Canada, the report highlights that the U.S. Federal Reserve Board has operated under an explicit dual mandate going back to 1946.
Amid trade policy uncertainty, the authors argue in the report that focusing monetary policy toward price stability is the better option ahead of the “structural adjustments this may bring.”
