Bank of Canada Introduces Dual Mandate Approach
The Bank of Canada has introduced a new dual mandate approach in its monetary policy strategy. This shift involves setting an inflation target of 2% while allowing flexibility around employment rates, aiming for full employment. The decision reflects the bank’s adaptation to recent economic realities and challenges.
Reasons Behind the Change:
- Economic Adaptation: Post-pandemic, the bank seeks to balance economic recovery with sustainable growth by considering employment alongside inflation targets.
- Comparison with Other Central Banks: Similar approaches are adopted in the U.S. and New Zealand, which have revised their monetary policies post-pandemic.
Challenges in Monetary Policy:
The complexity lies in managing dual objectives—inflate at 2% while allowing room for economic flexibility to avoid hard stops in growth.
Bank’s Strategy Moving Forward:
- The bank plans to stick with its existing inflation target despite some evidence suggesting it creates a ceiling for growth.
- Focus on employment targets, aiming for around 5.5% unemployment, though recognizing this is not the sole focus given current economic conditions.
Conclusion:
This change allows the Bank of Canada to navigate economic exit from the pandemic more effectively, balancing inflation control with employment considerations, while acknowledging the multifaceted nature of monetary policy challenges.
