Bank of Canada and Federal Government Renew 2% Inflation Target

The Government of Canada and the Bank of Canada announced the renewal of Canada’s monetary policy framework on November 5, 2026, retaining the 2% inflation target under a five-year agreement ending December 31, 2031. The decision preserves the central bank’s existing policy anchor as it prepares for more frequent supply disruptions.

The target remains the midpoint of the 1% to 3% inflation-control range, with inflation measured as the 12-month rate of change in the consumer price index (CPI). Policy will continue to operate symmetrically, giving equal emphasis to deviations above and below target. The Bank also retains flexibility to respond to economic shocks while maintaining a clear focus on returning inflation to target over time. Although the government and central bank jointly review the agreement every five years, the Bank independently conducts monetary policy.

The Inflation Episode Shaped the Review

The Bank’s consultation report supplies the recent history behind the decision. Canadian inflation reached a 40-year high of 8.1% in 2022 after major supply and demand shocks, a deep recession and a rapid rebound. The Bank describes its forceful interest-rate increases as a painful adjustment that returned inflation to 2% in the summer of 2024 without causing a recession or major job losses.

The joint statement treats that episode as a challenge to implementing the framework amid extraordinary global shocks, not as a failure of its design. High inflation eroded purchasing power and Canadians’ sense of economic fairness, while price stability helps businesses plan and invest and supports maximum sustainable employment and growth. The renewed mandate consequently keeps low, well-anchored inflation as its primary focus, with flexibility to support economic growth and strong, stable labour-market outcomes.

Research Focuses on Supply Shocks and Housing

The main changes concern implementation. The Bank says it has strengthened its analytical capacity to assess how global and domestic supply-side shocks transmit to Canadian inflation and how policy should respond when those shocks are larger and more persistent than normal. That work is framed by changes in international trade patterns, supply chains and global investment flows, alongside demographic shifts and widespread adoption of artificial intelligence.

The multi-year review examined three connected issues: monetary policy with more frequent supply shocks, robust measures of underlying inflation, and the relationships among monetary policy, housing demand and supply, and shelter-price inflation. It starts from two limitations: no single core-inflation measure works well in every circumstance, and monetary policy cannot directly increase housing supply. The research findings will be published in a forthcoming report.

Consultations Leave a Communication Challenge

Public input supported continuity at the target level but exposed disagreement over the mandate’s emphasis. The process included meetings with groups of Canadians in 11 cities in 2025, alongside consultations with economists, academics, financial institutions, pension funds, business and labour organizations, think tanks, consumer groups and community organizations. Stakeholders expressed strong support for flexible inflation targeting and the 2% target; some warned that changing it could de-anchor expectations and that raising it after elevated inflation could cause a significant loss of credibility. Labour groups favoured a dual inflation-and-employment mandate, while some other stakeholders wanted less emphasis on maximum sustainable employment.

Community feedback exposed a more immediate credibility problem. Many participants said the CPI did not align with their shopping experience, and grocery prices were a top concern even after inflation had returned to the control range. The report says the disconnect between official data and daily experience diminished trust in both the measure and the Bank. Private-sector economists and think tanks recommended simpler communication, greater focus on total CPI and clearer explanation that the Bank targets inflation rather than affordability. Most community participants found core inflation difficult to grasp, complicating that task. Participants also strongly preferred predictable, gradual rate changes, while stakeholders asked for clearer explanations of supply-shock trade-offs and when the Bank looks through particular shocks.

The renewal therefore fixes the objective while leaving substantial work in implementation and communication. The forthcoming research report will add the findings behind the Bank’s work on underlying inflation, supply shocks and housing. The consultation record defines the accompanying challenge: explaining that a return to 2% inflation does not reverse earlier price increases, and clarifying what monetary policy can and cannot do when supply disruptions drive prices higher.