Bank of Canada renews monetary policy framework for next five years, weighs inflation targeting shift

The Bank of Canada published a report this week summarizing feedback from stakeholders and the Canadian public during consultations on its monetary policy framework. The review comes as the Bank prepares to renew its agreement with the Government of Canada—a process that occurs every five years and will be finalized in 2026.

Former Bank of Canada Governor David Dodge and C.D. Howe Institute President and CEO Jeremy Kronick examined one of the biggest questions facing Canadian economic policy: whether the Bank's current approach remains fit for a rapidly changing economy.

At the centre of the debate is whether the Bank should stick with its existing "flexible inflation targeting" framework—focused on maintaining low and stable inflation—or adopt a dual mandate that would include both inflation control and maximum employment and output. The case for a dual mandate has gained traction as Canada faces supply shocks like tariffs.

However, the C.D. Howe Institute argues flexible inflation targeting should remain the central pillar. In a report, economists Jeremy Kronick, Steve Ambler, and Thorsten Koeppl contend that the success of Canadian monetary policy over the past three decades is tied to this framework. "In the run-up to the Bank of Canada and the federal government's renewal, the argument for the Bank to take on a mandate of both low and stable inflation, and maximum output and employment has gained traction," Kronick said. "However, the success of Canadian monetary policy over the last three decades is undeniable."

The economists argue that any attempt to systematically increase output and reduce unemployment through monetary policy will lead to more inflation in the long run. A dual mandate also relies too heavily on hypothetical concepts like "maximum employment," they contend.

The framework renewal will shape Canada's monetary policy for the next five years as the country grapples with tariffs, inflation concerns, and economic uncertainty.