Bank of Canada and the finance ministry renew the 2% inflation target for another five years

The Bank of Canada and the country’s finance department agreed to renew the central bank’s inflation-targeting framework for another five years¹. The bank unveiled the new five-year monetary policy framework jointly with the federal finance ministry².

Under the agreement, a target of two per cent inflation stays at the core of the central bank’s mandate^4,5. The government and the bank said in a joint statement that they review and renew the bank’s monetary policy framework every five years³.

The bank unveiled the framework on Thursday, the same day the government presented its second budget, under Prime Minister Mark Carney^2,9. The budget aims to curb Canada’s reliance on the United States⁶.

Why it matters to investors

The decision keeps the anchor for Canadian interest rate expectations unchanged at a moment when policy is tightening. The Bank of Canada raised interest rates in October for the first time in three years, hoping to tame inflation caused by surging energy prices⁶.

That hike has drawn questions from market analysts. One analysis asked whether the bank overreacted, questioning why it felt compelled to raise interest rates when the US Federal Reserve did not⁷. Currency strategists have cited the bank’s October hike as one of the factors shaping the outlook for the Canadian dollar⁸.

Keeping the target at two per cent means the bank’s policy decisions will continue to be judged against the same yardstick it has used, rather than against a revised goal^1,4. The framework is reviewed and renewed jointly by the bank and the government^2,3.

What to watch

Currency markets are weighing the bank’s stance against moves elsewhere. After the US midterm elections, a selloff in the US dollar supported the Canadian dollar, but falling crude prices prevented a stronger move⁸.

The framework now governs policy for its five-year term^1,2. The next test is how the bank applies it to inflation driven by energy prices, the force behind its October increase⁶.

The budget released on the same day sets the fiscal backdrop against which the bank will make those decisions. It uses higher oil revenue to spend on tax incentives and infrastructure⁹, while the bank’s goal for inflation stays at two per cent^4,9.