Bank of Canada Weighs Clearer Playbook to Handle Supply Shocks

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Currently, the major shocks hitting Canada stem from the Iran war-driven spike in oil prices and US tariffs. Both reflect broader shifts in global trade and geopolitics, raising the likelihood that Canada will face more episodes where inflation is high even as growth falters.

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Last week, the bank held its policy rate at 2.25%, saying the current stance “looks appropriate.” But Macklem stressed that rates could move in either direction if the outlook for inflation or growth changes.

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“The length of the trade dispute with the US or the blockade in the Strait of Hormuz are not things you can derive with an economic forecasting model,” Kelvin said. “Ultimately you only want to delay tightening if you believe the price shock in question is temporary.”

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Larry Schembri, who served as a deputy governor at the bank from 2013 to 2022, expects the renewed framework to reflect a world of more frequent supply shocks, including specific language to that effect. 

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“There may be more emphasis on flexibility and managing uncertainty,” he said in an interview, noting that similar wording has increasingly appeared in governing council speeches.

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Otherwise, he expects the framework to remain largely unchanged — and possibly more concise. 

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The 2% target isn’t under review. Policymakers say public confidence in the bank’s ability to return inflation to the 1%–3% range has held firm, a credibility that helped drive disinflation after the 2022 surge. Officials ultimately raised the policy interest rate to 5%, underscoring their commitment to the target.

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Carney’s Influence 

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Canada’s previous prime minister, Justin Trudeau, once famously remarked that he doesn’t think about monetary policy. That’s almost certainly not the case for Mark Carney — a former governor of the Bank of Canada and Bank of England.

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The government plays a joint role in the framework renewal. But despite Carney’s expertise, Schembri expects the prime minister to take a relatively hands-off approach.

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Carney “has gone through the process before and is comfortable with where the outcomes have come out in the past,” Schembri said, adding that the prime minister is “very aware of how circumstances have changed over the last five or six years.”

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Paul Beaudry, another former deputy governor, said Carney’s presence may help safeguard the central bank’s independence by insulating it from potential external pressures — such as calls for a higher tolerance for inflation. 

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“We don’t have to worry about having a real tension between the central bank and the government on the general goals of the renewal,” he said.

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During the 2021 renewal under Trudeau, the bank and government added supporting “maximum sustainable employment” to the mandate, as long as those efforts don’t compromise price stability. Policymakers also debated adopting a dual mandate for employment and inflation, similar to the Federal Reserve’s approach — a discussion shaped in part by concerns at the time about the lower bound for interest rates.

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A key question now is whether some of those employment references will be pared back, though economists surveyed by Bloomberg see little need for major changes.

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Speaking to reporters in December, Macklem said the addition of employment goals in the last renewal wasn’t a “significant change,” but rather “reflected in clearer terms what we’ve been doing for many years.”

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The bank also plans to review its measures of underlying inflation.

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Beaudry said adding explicit supply-shock language would help the bank explain why, in some cases, it is choosing to wait rather than adjusting interest rates prematurely.

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“What are the things that you are looking through, what are you keeping your eye on that would trigger decisions one way or another in those situations?” he said.

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—With assistance from Mario Baker Ramirez.

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