Canadian money
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Canada’s central bank has been told to keep the annual pace of price gains at its historic target, but also to help build up the labour market.

Since 1991, the Bank of Canada has targeted an annual inflation rate of between 1% and 3%, often landing in a sweet spot at 2%.

That range remains at the centre of the renewed inflation-targeting agreement with the federal government.

However, the new five-year deal outlines how the bank should consider how close employment levels are to the highest mark they can hit before fuelling inflationary problems.

The bank may decide to allow inflation to sit at closer to either end of the bank’s target range for short bursts as it determines when the labour market hits its full potential.

It also could mean that the central bank keeps its trendsetting interest rate at the lowest level possible for longer stretches to help the economy recover from a downturn.

“This agreement provides continuity and clarity, and it strengthens our framework to manage the realities of the world we live in,” Bank of Canada governor Tiff Macklem said in a statement.

“This is the framework we need now as we confront elevated inflation and the challenges of reopening the economy. And it is what we need looking ahead beyond the pandemic.”

The key policy rate since the start of the pandemic has been at 0.25%, lowered there to prod spending during the Covid-19 induced downturn and subsequent rebound.

As it stands, the bank doesn’t see a rate bump until April 2022 at the earliest.

Under the agreement unveiled Monday, the central bank says the rate may more often hit that rock-bottom level, and remain there for longer if the bank believes it will help get inflation back on target.

Documents released by the bank say that a low-for-longer rate environment boosts the likelihood that inflation could overshoot the 2% target as the economy recovers.

Rate hikes would only happen after inflationary pressures build, but not before inflation hits 2%.

As well, rate increases could be more gradual than in the past as the bank figures out if it has properly estimated the full potential of the labour market, meaning that inflation could again rise above the bank’s target.

Macklem and other senior central bank officials have repeatedly spoken of the need for the labour market to heal from the wounds caused by Covid-19 before the bank would rein in its economic stimulus, even as annual inflation rates have recently crept up.

The central bank says that figuring out when the country has hit “maximum sustainable employment” can’t be nailed down to one number, nor easily defined in a labour market being affected by a greying workforce and increased digitization.

The bank plans to outline which labour market markers it is monitoring and detail those as part of its regular rate announcements.