Trudeau Nears New Inflation Mandate as Delays Sow Doubts for BOC


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Prime Minister Justin Trudeau’s much-delayed review of the Bank of Canada’s inflation mandate will be released in coming days, a person familiar with the matter said.

The new agreement between the central bank and the government is coming “very soon,” a government official said, speaking on condition they not be identified.

Every five years, the Bank of Canada and federal government renew the bank’s monetary policy framework and the current mandate expires on Dec. 31. In the past two decades, no review has gone into December.

While economists aren’t expecting a major overhaul of the 2% inflation target, there’s a possibility Trudeau’s government makes tweaks that allow the central bank to tolerate higher inflation — giving it scope, theoretically, to go slower on rate hikes.

The delay though has cast uncertainty on the timing and pace of the Bank of Canada’s interest rate trajectory, economists say.

Governor Tiff Macklem held the benchmark interest rate at 0.25% in a policy decision Wednesday, maintaining guidance that borrowing costs could begin increasing as early as April. Right now, investors are pricing in five hikes next year amid growing inflation worries.

“It really just adds a layer of uncertainty because we’re not entirely sure what the Bank of Canada’s mandate is going to be in January and we’ll want to evaluate the prospects of rate increases based on that new mandate,” Josh Nye, an economist at Royal Bank of Canada, said by email.

Pressed about it Wednesday in the legislature, Trudeau said the government intends to renew the central bank’s mandate but offered no details on the content or timing of the deal.

There’s speculation there could be design or communication changes that would give the central bank more leeway to tolerate higher inflation, possibly by adding labor-market metrics to the mandate.

Bigger changes could include an explicit dual mandate targeting both employment and inflation, or average inflation targeting like the U.S. Federal Reserve adopted last year that allowed it to overshoot its own 2% target.

‘Last Minute’

The long delay in renewing the Bank of Canada’s mandate may suggest the Trudeau government is leaning toward a bigger change, according to Jean-Francois Perrault, chief economist at Bank of Nova Scotia.

“We are increasingly concerned that the BoC’s mandate may change,” Perrault said Thursday in a report to investors. “With roughly three weeks left before the decision deadline, the government — and possibly the BoC — may be considering serious changes to the BoC’s inflation-control mandate. Why else would they wait until the last minute to announce the results of the five-year review?”

Any major changes could backfire on the government at a time when price increases are already near three-decade highs, stoking inflation and wage expectations further. While the intention may be to slow interest rate increases, the end result could be a central bank forced to make even more dramatic hikes to bring inflation under control.

Canada Inflation Accelerates to 4.7%, Highest Since 2003

Since the 1990s, the bank has been narrowly focused on a single objective: to keep prices stable. The goal has been to keep inflation within a range of 1% to 3% as much as possible. Operationally, that’s meant aiming for a 2% target over the Bank of Canada’s forecast horizon, a period of about two years.

There’s some leeway, though. The central bank has scope to delay the return to target beyond the two-year span. Macklem and his officials also have discretion to put more weight on certain risks over others.

Because the current system already provides flexibility, many economists are largely supportive of the status quo — including at the Bank of Canada.

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