Central bank doesn't intend to amend its objective anytime soon
The Bank of Canada won't change its 2% target for inflation next year, governor Tiff Macklem said on Tuesday, confirming that the longstanding goal will remain in place for the foreseeable future.
In a speech in Mexico City, Macklem spoke about the evolution of central banking and reaffirmed the Bank of Canada’s commitment to its current monetary policy framework. He noted that despite a world increasingly prone to shocks and uncertainty, the 2% inflation target has served the country well and remains the foundation of policy.
The governor’s speech, titled Flexible Inflation Targeting in a Shock-Prone World, detailed the shift in monetary policy over the decades, moving from post-war stabilization efforts and price controls to money growth targeting and, eventually, the adoption of flexible inflation targeting. Macklem said this framework, adopted by the Bank of Canada in 1991, has been the most successful to date.
He pointed to Canada’s experience, where inflation averaged close to 2% for 25 years before the pandemic. Even during the 2022 inflation surge, which reached a 40-year high of 8.1%, the credibility of the 2% target helped anchor long-term expectations.
“The credibility of our 2% target was the foundation for this success,” he said. The governor added that the Bank’s forceful interest rate hikes brought inflation back to target in the summer of 2024 without a recession or major job losses.
Bank of Canada’s approach in a changing world
Macklem acknowledged that the global economy now faces more structural headwinds, including geopolitical tensions, new US tariffs, and more frequent climate events. These factors, he explained, could lead to more frequent supply shocks and greater variability in inflation. He stressed that while monetary policy cannot resolve these underlying issues, the Bank of Canada is adapting its approach by using non-traditional data and investing in new economic models that can better capture the effects of sectoral disruptions.
He also discussed managing uncertainty by placing less weight on single forecasts and relying more on scenarios to evaluate a range of potential outcomes. Macklem cited the Bank’s use of scenarios to navigate unpredictable US trade policy in recent interest rate decisions.
As the Bank of Canada prepares for its next framework renewal in 2026, Macklem said it is considering three key questions: how to respond to supply shocks, the best way to measure core inflation, and how housing affordability interacts with monetary policy. However, he was clear that one element will not be revisited.
“Perhaps I’ll spoil it a bit by telling you that one thing we aren’t revisiting this time around is the 2% inflation target itself,” he said. The governor concluded that the target has proven its value and now is not the time to question it.
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