The Bank of Canada has restated its case for keeping inflation at 2%, the midpoint of its 1% to 3% control range, arguing that a clear and credible target helps the entire economy function better.
In a new explainer, the central bank says the goal keeps price gains low, stable, and predictable, which in turn supports planning, hiring, and investment across households and businesses.
The Bank also points to the early 2020s, when inflation spiked to 8.1% in June 2022, and notes that tightening brought inflation back near the goal over time.
The message is simple: the target sets expectations, and expectations shape outcomes.
Canada adopted inflation targeting in 1991 after years of volatile price growth. Since then, inflation has hovered around 2% most of the time, even through significant shocks.
The Bank sees that history as evidence the framework works, not because the economy is free of surprises but because a widely understood objective helps dampen them.
A public focal point reduces the odds that firms and workers bake in high inflation to contracts and wages.
It also provides a transparent yardstick by which to judge policy decisions.
The Bank’s review process matters just as much as the number itself.
Ottawa and the Bank revisit the framework every five years to test whether 2% still delivers the best mix of stability and flexibility.
The latest write-up frames the challenge plainly: more frequent supply shocks, a more volatile global cycle, and housing that has not kept up with demand all complicate the job.
A regular refresh allows officials to reassess tools without moving the goalposts that anchor expectations.
Why 2% and not zero, or four?
The Bank’s answer starts with risks at both tails. Too low, and you flirt with deflation, which discourages spending and hiring and can magnify downturns.
Too high, and purchasing power erodes while uncertainty rises. The midpoint target aims to thread that needle.
It gives policymakers room to lean against slumps when inflation dips below target and to lean against overheating when it runs above.
It also gives markets a fixed reference point for pricing money.
That anchor carries real-world consequences for borrowers and investors.
Mortgage and business loan costs depend on the path of the policy rate, which the Bank adjusts to guide inflation back to target.
When inflation pressures are stubborn, markets often price higher-for-longer rates.
In those stretches, the Canadian dollar slips, bond yields climb, and equity valuations tend to compress.
When disinflation gains traction, the opposite usually applies. The target, in other words, is not an abstraction. It is the reference point behind every move in rates and risk assets.
Energy, taxes, and public spending can influence short-term prints, and investors have watched as tariffs are shaping inflation alongside other supply factors.
That noise does not alter the target, but it affects how forcefully the Bank must act to keep the average near 2%. Meanwhile, growth data feed the same calculus.
When output softens, as it did in mid-year data where GDP rose 0.2%, policymakers weigh the cost of further restraint against the benefit of steadying prices.
The plumbing of Canada’s money markets also reflects the framework. As the federal government’s fiscal agent, the Bank publishes a fresh T-bill calendar and manages government securities operations that influence liquidity and transmission into short-term funding rates. Those mechanics do not set the inflation target, but they help transmit policy to where borrowers and savers feel it.
A clear 2% objective allows households to judge whether their wages are keeping up, firms to plan price adjustments, and markets to test whether policy is doing what it says on the tin.
The Bank underscores that it reviews the framework every five years with the federal government to ensure the approach still fits a changing economy.
