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Targeting inflation during the pandemic

In his first speech, Governor Tiff Macklem explains how the Bank’s commitment to low, stable and predictable inflation has guided our actions during COVID-19.

Watch Governor Macklem speak to Canadian Clubs across the country via webcast.

A beacon in good times and bad

Our primary mission is to deliver low, stable and predictable inflation. This is the best contribution we can make to Canada’s economic welfare. It’s the foundation of economic growth, and when inflation is near its target, everyone who wants to work can find a job.

Our beacon, our framework for monetary policy, is a five-year agreement between the democratically elected government and the Bank of Canada. It allows us to operate independently in pursuing our goal and gives Canadians confidence that we will achieve our target.

The basic ingredients of inflation targeting

Successfully targeting inflation requires a number of core ingredients, and COVID-19 is affecting all of them.

A measure of inflation

The first key ingredient is having a measure of inflation that everyone agrees on. We use the consumer price index (CPI), which is the best inflation measure out there. The CPI includes the prices of a basket of goods and services that Canadians buy on average. The stuff we buy more of has a greater weight in the basket. But COVID-19 is changing our shopping habits. We are working to understand what this means for inflation.

Because of the pandemic, Canadians are spending much less on gasoline and air travel, and more on food purchased from stores. And until very recently, they weren’t spending anything on haircuts. The implication is that the CPI isn’t fully reflecting people’s current inflationary experience.”

Supply and demand

The second key ingredient is understanding how much demand there is compared with supply. If demand for goods and services is greater than what an economy can supply, inflation goes up. And if the supply of goods and services exceeds what people want, inflation goes down.

During COVID-19, the economy’s capacity to supply people with the things they need took a major hit. This was the result of the measures put in place to contain the virus, including physical distancing and temporary business closures.

And with millions of Canadians losing their jobs or working less, spending in the economy—or demand—dropped sharply. Until people are back at work and feel more confident, they will remain cautious with their spending.

If, as we expect, supply is restored more quickly than demand, this could lead to a large gap between the two, putting a lot of downward pressure on inflation. Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work.”


The third ingredient are the tools we use to keep demand and supply balanced, and inflation on target. Our main tool is the policy interest rate.

When the pandemic hit Canada in March, we lowered the interest rate to 0.25 percent. As businesses reopen, low interest rates will help support spending and borrowing, so demand can return to normal over time.

We also acted to make sure key markets were working well so that our interest rate cuts work as intended and credit continues to flow to businesses and people who need it.

And we are buying at least $5 billion of Canadian government bonds a week until the recovery is well underway. Through a process known as quantitative easing, these bond purchases will make borrowing cheaper for households and businesses.

Looking through the fog

The pandemic has created a fog of uncertainty, and this makes it harder to get a clear outlook for growth and inflation.

We don’t know what will happen with the course of the virus, with supply and demand, or with consumer and business confidence. As the economy reopens and people go back to work, we should see some positive signs. But the pandemic is likely to cause some lasting damage, and the recovery will be bumpy.

While we are using different tools in these extraordinary times, our policy remains grounded in the same framework. The inflation target is our beacon that is guiding our actions as we help bring the economy from crisis, through reopening, to recuperation and recovery.”

Watch Governor Macklem answer questions from the media following his speech.

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