Bank of Canada governor Tiff Macklem said the central bank will study whether new economic conditions warrant a higher inflation target, a concession to critics who argue the current objective is too restrictive for a time when much of what influences prices will be beyond the reach of monetary policy. 

Those critics shouldn’t get too excited yet. Macklem said the study would be done as part of the research program the central bank will conduct to inform its next mandate renewal in 2026. He was adamant that doing so before then would be a mistake, as it would give the public reason to doubt the Bank of Canada’s willingness to achieve its mandate.

“Our mandate is to achieve two per cent inflation,” Macklem said in an interview with The Logic Tuesday. “If you decide that it’s not worth getting your target just because it’s difficult, you don’t have a target. You don’t change course just because you missed it.”

The government and the central bank agree on formal marching orders every five years, an arrangement that gives Parliament the ultimate say over monetary policy, while ensuring the governor has sufficient independence to deliver those objectives without having to worry about political interference. 

Finance Minister Chrystia Freeland re-upped the Bank of Canada’s mandate to achieve headline inflation of two per cent at the end of 2021. Her decision followed the most extensive review of policy options since the central bank switched to inflation targeting in the early 1990s, including a “horse race” that simulated what various approaches would have achieved under hypothetical conditions based on historical data. Nothing produced significantly better results than the existing approach, so the Bank of Canada recommended sticking with what it knew. 

Raising the target was excluded from the “horse race,” however; the Bank of Canada had studied it previously and found it wanting. But the idea is back as a subject of debate among economists because so much has changed since then. Globalization, the end of the Cold War, favourable demographics and super-efficient supply chains all combined to put downward pressure on prices through the late 1990s and 2000s. Now, all of those forces have reversed, raising questions about whether the higher interest rates that could be required to hit current inflation targets will cause more harm than good. 

“This question is on people’s minds,” Macklem said. “We should look at this question.” 

The research on a higher inflation target will have to be overwhelming to convince him to recommend a change. 

“We need to have an open mind, but I have to say, I’m not convinced,” he said. “I have a hard time seeing how adding more uncertainty—taking away your anchor—is going to make those real adjustments easier.” 

Negotiating a new mandate could be one of Macklem’s final acts as governor. His seven-year term ends in June 2027.