| Date | Policy Interest Rate (%) | Inflation Target (%) | CPI Inflation Rate (%) |
|---|---|---|---|
| Jan 16 | 0.50 | 2.0 | 1.5 |
| Jul 16 | 0.50 | 2.0 | 1.3 |
| Jan 17 | 0.50 | 2.0 | 1.5 |
| Jul 17 | 0.75 | 2.0 | 1.2 |
| Jan 18 | 1.25 | 2.0 | 1.7 |
| Jul 18 | 1.50 | 2.0 | 2.2 |
The Bank of Canada’s primary monetary objective is to sustain low, stable, and predictable inflation. Price stability is defined through an inflation-control target of 2%, which is the midpoint of a 1% to 3% target range. The inflation target is expressed as the annual rate of increase in the Consumer Price Index (CPI). If inflation deviates significantly from the target, the Bank must clearly explain the structural factors behind this divergence and outline its strategy to steer inflation back to the 2% anchor. (lines 1–7)
To influence economic activity and manage inflation, the Bank of Canada adjusts its target for the overnight rate—its key policy interest rate. By altering the policy rate, the Bank influences market interest rates, credit conditions, and aggregate spending across the economy. When total demand outpaces the productive limit of the economy, upward price pressures build. (lines 8–12)
In its mid-2017 deliberations, the Governing Council noted that the domestic economy had expanded at a unexpectedly robust pace, exceeding its long-run potential growth rate. While growth in major trading partners like the United States remained stable, domestic demand in Canada was increasingly self-sustaining, driven by strong employment growth and housing investment. (lines 1–5)
Although CPI inflation had temporarily dipped below 1.5% due to transitory effects of energy pricing and import competition, core inflation measures remained resilient. As excess capacity was rapidly absorbed and a positive output gap emerged, the Bank projected that capacity constraints would soon begin pointing upward. (lines 6–11)
To pre-empt these medium-term inflationary pressures, the Bank of Canada judged that a 0.25 percentage point increase in the policy rate was appropriate, starting a transition away from the highly stimulative monetary policy stance. (lines 12–14)
Define the term 'positive output gap' (Extract C, line 11).
327 exam-style questions on AQA A Level Economics 2.3 Economic performance, covering 2.3.1 Economic growth and the economic cycle, 2.3.2 Employment and unemployment, 2.3.3 Inflation and deflation, and 2.3.4 Possible conflicts between macroeconomic policy objectives. Each one has a worked solution and a mark scheme showing where the marks go.