Bank of Canada formalises its implicit employment goal in new inflation mandate

Earlier in the year, speculation over the Bank of Canada’s inflation mandate review was rife following the Fed’s adoption of an Average Inflation Target framework and concerns over the labour market recovery post-pandemic.

With the year quickly running away from them, the Bank of Canada today formalised the new inflation framework, which doesn’t deviate too much from the previous one in practice and falls largely in line with analysts’ expectations. The BoC will continue to target inflation at the 2% target, which is seen as a symmetrical target, while maintaining the 1-3% tolerance band. However, the minor tweak is that they will implicitly include an employment objective, falling short of employing a dual mandate similar to the Fed, and will utilise the flexibility allowed to them by the tolerance band in order to promote full employment.

While today’s announcement falls in line with what economists were largely expecting and is merely a formalisation of the mandate that has been in practice since the onset of the pandemic, it is being viewed as a marginal dovish development by markets.

Canadian front-end bond yields dropped near 3bps on the announcement, while the loonie extends its daily losses. However, this knee jerk reaction may be too aggressive in our view as the current labour market trajectory in Canada is unlikely to derail the BoC’s normalisation path over the 12-24 month horizon. Instead, we expect recent price action to largely reverse, especially once Freeland and Macklem speak at 11:00 ET/ 16:00 GMT.

Front-end bond yields drop on the inflation mandate renewal, extending loonie losses on the day 

Author: Simon Harvey, FX Market Analyst

Disclaimer

This information has been prepared by Monex Canada Inc., an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Canada Inc., or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.