MNI INTERVIEW: Strip Job Language From BOC Mandate- Ex Fellow

The Bank of Canada should remove full employment language from its mandate and return to a single target for inflation as had stood for decades previously, a former BOC research fellow told MNI, suggesting a change in next year's policy review that would see former governor and now Prime Minister Mark Carney undo a move by his predecessor Justin Trudeau's administration.

“Inflation targeting where the central bank is really just interested in one goal, it’s very clear, it’s very transparent, it has been very successful” McGill University economics Professor Francisco Ruge-Murcia said. “I also don’t think that the change in language was ideal in the previous edition.”

Canada was the first G7 nation to adopt an inflation target in the early 1990s and reviews the mandate every five years, with several governors over time praising the success of the 2% goal in keeping prices low and stable. The last renewal between Governor Tiff Macklem and Trudeau's Finance Minister Chrystia Freeland in late 2021 added language about seeking "maximum sustainable employment" when the inflation goal is met. 

“You really cannot hit two targets with one instrument,” Ruge-Murcia said. Economists have long held the view interest rates can only effectively control one major economic variable and not employment and inflation at the same time, while stabilizing inflation often means getting the economy to a place where employment is also robust. “In a way, it’s kind of embedded in the goal of having an inflation target.”

Resetting the Bank's mandate when it comes due at the end of next year is a good idea because the soft dual mandate “forces the Bank to sort of trade off on employment and inflation in a way that I think isn’t ideal,” Ruge-Murcia said.

CONFLICTING SHOCKS 

At the last renewal officials acknowledged inflation had climbed well above target in the pandemic rebound and the employment goal could not be pursued at the time. While the Bank cut its policy rate from 5% last June to 2.75% as inflation was wrestled back to target from 8%, Macklem has said little about full employment recently. The jobless rate has crept up to 7% this year, the highest since 2016 outside of Covid. 

Macklem has held rates for the last two meetings, citing the risk of weakness from U.S. trade tensions and concerns about core inflation quickening past 3%. At the last decision he said there's evidence he will need to cut again later this year. 

Ruge-Murcia agreed with that stance, citing early evidence the job market is pointing to bigger weakness in the economy while the trend in core prices after initial tariffs remains unclear. (See: MNI INTERVIEW: Mild Stimulus Cures Canada Recession- Ex-Clerk)

“In Canada, the issue is that the effect of the tariffs on employment may be larger, and it may take effect faster. Already there have been layoffs, and already unemployment [is rising],” he said. “This may probably induce the Bank to reconsider the last decision, and perhaps to cut the interest rate.” 

Shifting U.S. trade announcements make it difficult to give a precise rate forecast, he said. “There are shocks for which inflation and output move in the same direction, and there are shocks in which they move in opposite directions,” Ruge-Murcia said. “This is what makes the work of the central bank so difficult.”