New Bank of Canada mandate maintains inflation target but keeps one eye on jobs picture, too – CBC News
The Bank of Canada's new mandate will see the central bank continue to target inflation in a range of between one and three per cent, but keep one eye on the job market in making its policy decisions, too.
Finance Minister Chrystia Freeland and Bank of Canada governor Tiff Macklem detailed the bank's new mandate at a news conference in Ottawa on Monday morning.
The bank's five-year mandate expired this year, so Ottawa consulted with experts and stakeholder across the country to see if any changes were needed to adjust the guiding principle that the bank keeps top of mind in making its policy decisions.
Much like many other central banks, the Bank of Canada has targeted inflation since 1991, when its mandate was to set policy with a view to keeping inflation in a range of between one and three per cent.
All things being equal, that means the bank's only job is to try to nudge inflation up or down as needed. When inflation is low, the bank generally cuts its rates to encourage borrowing and spending and investment. It raises its rate when inflation is above that range to try to cool things down.
Generally speaking, the system has worked well for decades, but the pandemic has thrown a wrench in the works as sustained low interest rates implemented to deal with COVID-19 were a factor causing inflation to run near zero early on in the pandemic, but more recently has swung in the opposite direction and is currently sitting at an 18-year high.
There has been a suggestion in recent years that central banks should consider moving away from inflation targeting, and try to achieve other goals with their monetary policy. That could include setting their policy to encourage full employment, for example, or to raise or lower the value of the country's currency — even if that means inflation heats up or cools down as a result.
But after extensive consultations over the past year, Macklem said that it became clear that continuing to target inflation above all other considerations was still the best course of action.
"It's very hard to beat inflation targeting," he said. "It has served us very well."
WATCH | The difference between a dual mandate and the bank's new policy, explained:
Bank of Canada's new mandate, explained
Finance Minister Chrystia Freeland and governor of the Bank of Canada Tiff Macklem explain how the Bank of Canada's policy is different from a so-called 'dual mandate' 1:45
The new mandate gives the bank the ability to keep targeting the inflation the way it always has, but gives it added leeway to consider what's happening with Canada's employment picture in setting its policy.
The government and the bank "believe that the best contribution of monetary policy to the well-being of Canadians is to continue to focus on price stability," the central bank said in a release, adding that they "also agree that monetary policy should continue to support maximum sustainable employment."
"The bank will continue to use the flexibility of the one to three per cent control range to actively seek the maximum sustainable level of employment when conditions warrant."
Falls short of 'dual mandate'
While that's a change, it's well short of implementing what's known as a "dual mandate" whereby the bank would be officially tasked with considering two things at once, weighing them against each other as needed, and theoretically trying to optimize both at once wherever possible,
Economist Avery Shenfeld with CIBC says the new mandate makes it clear that worrying about inflation is still the No. 1 target.
"The words 'will continue' implies that this is something that the Bank of Canada has already been doing, and 'when conditions warrant' implies that the primary goal remains the achievement of the inflation target," he said.
"This is not a dual mandate with an equal weighting on inflation and full employment."
Economist Benjamin Reitzes with BMO Capital Markets agrees with that assessment of the impact of the new policy.
"It's clear that the employment aspect is going to be used as needed rather than providing a firm restriction on policy, though it provides a bit more flexibility for the Bank of Canada," he said.
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House Price Index rose 26% in 2021, fastest pace on record – CBC News
The Canadian Real Estate Association's House Price Index rose by 26.6 per cent in the 12 months up to December, the fastest annual pace of gain on record.
The group, which represents more than 100,000 realtors and tabulates sales data from homes that listed and sell via the Multiple Listings Service, said the supply of homes for sale at the end of the month hit an all-time low.
After pausing for a few weeks in the early days of the pandemic, Canada's housing market has been on an absolute tear for the past two years, as feverish demand from buyers wishing to take advantage of rock-bottom interest rates has drastically outpaced the supply of homes to buy.
That imbalance is a major factor contributing to higher prices, as buyers have to pay more and more to outbid others because of the lack of alternatives.
Various experts are suggesting that parts of the country are showing signs of being in a speculative bubble, and CREA says the biggest reason for runaway price increases is that there aren't enough homes being put up for sale.
"There are currently fewer properties listed for sale in Canada than at any point on record," CREA's chief economist Shaun Cathcart said. "So unfortunately, the housing affordability problem facing the country is likely to get worse before it gets better."
High prices not denting demand
CREA says the average price of a Canadian home that sold on MLS in December went for $713,500. That's actually down from the record high of more than $720,000 in November, but still well up on an annual basis.
High prices don't seem to be slowing demand, however, as 2021 was the busiest year for home sales ever. Some 666,995 residential properties traded hands on MLS last year, smashing the previous annual record by 20 per cent.
TD Bank economist Rishi Sondhi said that there was a less than two-month supply of homes for sale during the month, which means at the current sales pace, all listings would be gone in less than two months. Under normal conditions, there's a five-month supply of homes for sale, and Sondhi says that supply and demand imbalance is a major factor in eye-popping price gains.
"With interest-rate pull-forward behaviour keeping demand so strong, and supply struggling to keep up, it's little wonder why prices are continuing their relentless upward march," he said. "Buyers pulling forward demand ahead of looming interest rate hikes kept sales at unsustainable levels last month. How long this effect will last is uncertain, but it should eventually fade."