News & Analysis

Earlier in the year, speculation over the Bank of Canada’s inflation mandate review was rife following the Fed’s adoption of an Average Inflation Target framework and concerns over the labour market recovery post-pandemic.

With the year quickly running away from them, the Bank of Canada today formalised the new inflation framework, which doesn’t deviate too much from the previous one in practice and falls largely in line with analysts’ expectations. The BoC will continue to target inflation at the 2% target, which is seen as a symmetrical target, while maintaining the 1-3% tolerance band. However, the minor tweak is that they will implicitly include an employment objective, falling short of employing a dual mandate similar to the Fed, and will utilise the flexibility allowed to them by the tolerance band in order to promote full employment.

While today’s announcement falls in line with what economists were largely expecting and is merely a formalisation of the mandate that has been in practice since the onset of the pandemic, it is being viewed as a marginal dovish development by markets.

Canadian front-end bond yields dropped near 3bps on the announcement, while the loonie extends its daily losses. However, this knee jerk reaction may be too aggressive in our view as the current labour market trajectory in Canada is unlikely to derail the BoC’s normalisation path over the 12-24 month horizon. Instead, we expect recent price action to largely reverse, especially once Freeland and Macklem speak at 11:00 ET/ 16:00 GMT.

 

Front-end bond yields drop on the inflation mandate renewal, extending loonie losses on the day 

 

Author: Simon Harvey, FX Market Analyst

 

 

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