Bank of Canada Reviews Monetary Framework, Affirms Commitment to 2% Inflation Target

In a comprehensive review of its monetary framework, Bank of Canada Governor Tiff Macklem has indicated the bank's continued support for the current 2% inflation target.

Key Takeaways:

* Macklem emphasized the effectiveness of the 2% target in achieving price stability, noting that now is not the time to reassess it.
* The bank will prioritize addressing immediate framework challenges, including enhancing its playbook for handling supply shocks.
* Macklem acknowledged the need to assess the appropriateness of current core inflation gauges, considering recent volatility.
* The bank will explore adopting a broader approach to underlying inflation metrics and examine their robustness.
* Macklem recognized the potential impact of the housing market on monetary policy and the need to consider measures to mitigate housing price distortions.

Economic Impact of Potential U.S.-Canada Tariff War

Governor Macklem outlined the potential consequences of a hypothetical tariff war between the United States and Canada. The bank's analysis suggests that:

* Exports would decline by 8.5%, leading to production cuts and job losses.
* Consumer spending would drop by over 2%, as household income decreases and retaliatory tariffs raise consumer prices.
* Investment spending would also fall by nearly 12%, due to higher costs and lower profit margins.
* Overall, the economy could contract by almost 3% over two years, erasing potential growth.
* Monetary policy can only partially mitigate the impact of tariffs, as it cannot restore lost supply.

Governor's Concerns and Recommendations

Macklem expressed concern that tariffs could lead to persistent inflationary expectations. He also commended Canadian policymakers for prioritizing productivity and investment enhancements to strengthen the economic union. Reducing trade barriers and harmonizing regulations could offset potential increases in trade friction.