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MNI STATE OF PLAY: BOC- Hot CPI Still Focus Amid New Job Goal


Governor Macklem spoke after revising inflation agreement with government.

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Bank of Canada Governor Tiff Macklem on Monday said his focus remains bringing inflation back to the 2% target and now isn't the time to use an expanded mandate giving him flexibility to seek maximum employment.

“This is an agreement for five years, and with respect to this idea of actively seeking or probing for maximum sustainable employment, I want to underline that’s something that you do when inflation is close to target and interest rates are at more normal levels," Macklem said at a press conference in response to a question from MNI. "That’s not the situation that we’re in right now. Right now inflation is well above our target and we’re very focused on assessing the diminishing degree of excess supply in our economy and bringing inflation sustainably back to target.”

Macklem and Finance Minister Chrystia Freeland on Monday added a new mandate to seek maximum employment when possible within its primary goal of targeting 2% inflation, a move few expected and the biggest overhaul of an agreement with the government since CPI targeting was introduced three decades ago.

The move away from a single inflation target included half a dozen references to maximum or inclusive employment, several mentions of inequality and a commitment to incorporate climate change into economic projections. Sources told MNI before the decision that big changes were unlikely amid the fastest inflation in decades and former Governor Stephen Poloz told MNI central banks globally could face pressure to tolerate some unhealthy inflation to make deficit financing easier.

The BOC will use "flexibility" to pursue full employment when consistent with "price stability" such as keeping inflation within its 1%-3% target band and medium-term inflation expectations "well anchored" at 2%, the statement said. Changes in the global economy mean the policy interest rate may remain low for longer than usual, rise more slowly, and other tools like forward guidance and balance-sheet expansion may be used more often, according to a separate BOC background paper.


Liberal Prime Minister Justin Trudeau and Freeland left the decision to weeks before the year-end lapse of the BOC's mandate agreement with the government, following a campaign for a September election where voters denied them a majority amid anger about inflation and Trudeau's stumble saying he didn’t think much about monetary policy.

Opposition Conservatives pressured Trudeau to stick with a straight 2% mandate and questioned BOC bond purchases quadrupling the balance sheet to CAD500 billion during the pandemic, saying it raised questions about back-door financing of record deficits while adding to inflation pressures.

Macklem shifted QE to a "reinvestment" phase at the last meeting in October and has said that stance will remain at least until he lifts interest rates. The BOC on Wednesday left its key rate at 0.25% and said conditions for a hike may not come until the middle quarters of next year. Economists see a move in April and markets see a hike even sooner with perhaps five increases next year.

The Bank has said that while it’s watching upside inflation risks, prices should slow in the second half of next year. The adoption of targets saw inflation slide from well over 5% to about 1% by the middle of 1992, which could limit how much rates need to climb. The joint statement Monday called inflation elevated while also saying it's a global phenomenon.

“This mandate renewal is a recognition and a making explicit of what the Bank has quite rightly already been doing -- maintaining maximum sustainable employment is critical to have sustainable, predictable on-target inflation,” Freeland told reporters.