For a long time now, those in charge of interest-rate policy at central banks worldwide have tended to trust one indicator to guide their decisions: inflation.
In 2019, the Reserve Bank of New Zealand, which in 1989 became the first central bank to adopt a formal inflation target, was told by Jacinda Ardern’s government to include “maximum sustainable employment” as an objective. Earlier this year, Ardern added “sustainable house prices, including dampening investor demand for existing housing” to governor Adrian Orr’s agenda.
Elsewhere, the U.S. Federal Reserve last year said it would aim to achieve average inflation of about 2% over a period of time, rather than keep the rate of increase locked at a cruising speed of 2%. The European Central Bank is in the process of reviewing its policies and its president, Christine Lagarde, seems keen to take on a bigger role in the fight against climate change. Boris Johnson’s government in the United Kingdom has already decided to put the Bank of England closer to the front lines, informing the central bank earlier this month that its purchases of corporate bonds must now consider the "climate impact of the issuers."
Canada’s central bank is also rethinking things.
Bank of Canada Governor Tiff Macklem in an interview last week said that he and his deputies were on track to give policy recommendations to Finance Minister Chrystia Freeland in the "second part of the year," which would align with the end of the Bank of Canada’s current mandate from the government. "There have been some discussions (with Finance) at a working level, but not at a senior level," he said.
Canada’s review of monetary policy is more structured than those of its peers. The central bank gets revised marching orders from the finance minister every five years, although that mandate is heavily influenced by the Bank of Canada’s internal assessments of the optimal way to set interest rates.
The government has done little but tweak monetary policy since the current approach to inflation targeting was adopted in the early 1990s. The bar for change is extremely high, but policy-makers have approached the current review with an open mind.
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