As we step into the new year, the world is becoming increasingly uncertain. The Bank of Canada governor, Tiff Macklem, has emphasized that the central bank is preparing for a future that is more prone to shocks.
The Uncertainty Ahead
In an end-of-year speech delivered to the Greater Vancouver Board of Trade, Macklem highlighted the structural changes happening in the world economy, including trade protectionism, demographic shifts, digitalization, decarbonization, and deglobalization. These changes are creating uncertainty and making it challenging for policymakers to navigate the economic landscape.
Monetary Policy’s Role
Macklem stressed that monetary policy cannot eliminate any of this uncertainty but can avoid making it worse by keeping inflation low and stable. He acknowledged that the world is becoming more "shock-prone" and emphasized the need for international cooperation between central banks to address shared global risks.
Priorities for 2024
Macklem outlined three priorities for the Bank of Canada in the coming year:
International Cooperation
The governor highlighted the importance of international cooperation, particularly in the context of the G7 meetings that will take place in Canada in 2025. He emphasized that shared global risks require collective action and noted that interest rates and sovereign debt remain high while growth is slowing.
Improved Economic Modelling
Macklem emphasized the need for improved economic modelling to better track supply disruptions and their impact on overall inflation. The new models will also distinguish between inflation caused by higher demand and inflation caused by higher input costs, allowing policymakers to develop more effective monetary policy responses to shocks.
Review of Inflation-Targeting Framework
The Bank of Canada is currently reviewing its inflation-targeting framework, which is reviewed every five years. Macklem highlighted the need for the central bank to consider several key questions, including:
- How do we identify and measure underlying inflation in a more volatile world?
- Is two percent still the best target for the future?
- What’s the interaction between housing affordability and monetary policy?
Gradual Approach to Monetary Policy
Macklem emphasized that when it comes to rate decisions, the central bank will take a more gradual approach to monetary policy if the economy performs as expected. The current policy rate is 3.25 percent after five consecutive cuts since June.
Conclusion
The world is becoming increasingly uncertain, and policymakers must be prepared to navigate these challenges. The Bank of Canada governor, Tiff Macklem, has emphasized the need for international cooperation, improved economic modelling, and a review of the inflation-targeting framework. By taking a gradual approach to monetary policy, the central bank can help stabilize the economy and give Canadians confidence in their cost of living.
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