Every five years, the Bank of Canada collaborates with the Government of Canada to reassess and renew their monetary policy framework. Currently, this review is taking place, and the finalized framework is set to be implemented by 2026 for the next five years.
This renewal process has a significant backdrop, particularly the challenges posed by the COVID-19 pandemic, which rigorously tested Canada's existing monetary policies. "Flexible inflation targeting has delivered low, stable, and predictable inflation for the preceding 25 years," noted the Bank, underscoring the successes that preceded the pandemic.
The economic environment during the pandemic was marked by substantial shocks to both demand and supply, leading to a severe economic downturn, followed by a swift recovery. As the economy began to reopen, inflation surged to a high of 8%. In response, the Bank of Canada implemented a substantial hike in its policy interest rate, aimed at restoring inflation to the target range of 2%—the core intention of their monetary policy framework.
Ultimately, the framework's effectiveness is not solely measured by how closely inflation aligns with the target, but also by its capacity to withstand economic shocks. "The framework was tested—and it proved resilient," the Bank stated, emphasizing the importance of this stability amid adversity.
As they embark on this review, the focus has shifted towards maintaining resilience in a more volatile global economy. As outlined in their current agreement, the foundational principle remains an inflation target of 2%, situated within a range of 1% to 3%. This model has consistently demonstrated its ability to foster price stability since its inception in 1995.
However, as Canada faces an increasingly unpredictable economic landscape, several factors complicate the path ahead. "Ongoing structural forces such as deglobalization, digitalization, decarbonization, and demographic shifts are making our economy more vulnerable to economic volatility, both domestically and from abroad," the Bank explained, pointing to how global dynamics influence local conditions.
Frequent supply shocks, exacerbated by trade disputes, supply chain interruptions, and extreme weather events are also on the rise. Moreover, a persistent challenge remains in the housing sector, where years of inadequate supply have led to worsening affordability. “Housing affordability is a major concern for Canadians, and rising housing costs feed inflation,” the Bank acknowledged, while also noting that monetary policy alone cannot rectify the supply issues.
Crucial inquiries guiding this review cycle include: - Should the Bank adopt a broader range of policies to target inflation in light of ongoing structural shifts? - What methods will most effectively measure underlying inflation amid increasing volatility? - How are housing demand and supply influenced by monetary policy, and what does this mean for inflation related to shelter prices?
“The renewal process gives the Bank an opportunity to reflect on what’s working well and where we can consider improvements,” the Bank stated, reiterating its commitment to thorough analysis and inclusivity in this important process. Throughout the review, researchers will delve into economic challenges and engage with Canadians to gather diverse perspectives.
As these discussions unfold, the Bank will provide updates to the public, culminating in a comprehensive report by late 2026. This document will synthesize research findings and feedback received during consultations, alongside the new agreement on Canada’s monetary policy framework.
As the landscape of monetary policy continues to evolve in response to both domestic pressures and global shifts, this proactive renewal holds the potential to strengthen Canada’s economic resilience in the face of future challenges.