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Some experts are fretting about central bank’s independence when it comes to monetary policy
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The Bank of Canada is supposed to be free from government interference, but elected officials have become more vocal about interest rates, inflation and the effect on their citizens, leaving some experts fretting about the central bank’s independence when it comes to monetary policy.
“Everybody should just shut up,” said Christopher Ragan, founding director of the Max Bell School of Public Policy at McGill University in Montreal, following remarks by Chrystia Freeland and three premiers regarding the Bank of Canada’s interest rate hold last week.
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The central bank’s decision to hold rates at five per cent “is welcome relief for Canadians,” the federal finance minister and deputy prime minister said in a statement after the central bank announced its decision on Sept. 6. “As the bank continues this work, my number one priority is to use all the tools at my disposal, and to work with partners at other levels of government across Canada, to ensure that interest rates can come down as soon as possible.”
Freeland said she respected the Bank of Canada’s independence, but others aren’t so sure.
“Frankly, I would have thought that the federal minister of finance would know better than to express that kind of view,” Ragan said. “To say that you are relieved that the Bank of Canada didn’t raise the interest rate might lead somebody to wonder, ‘Did the federal minister of finance put pressure on the Bank of Canada?’”
Freeland wasn’t the only politician to express her views. The premiers of British Columbia, Ontario and Newfoundland and Labrador also weighed in just days before the central bank’s decision.
B.C. Premier David Eby in a letter told Macklem to consider that “people are hurting” due to the rising cost of borrowed money.
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“In your role as governor, I urge you to consider the full human impact of rate increases and not further increase rates at this time,” he said in his Aug. 31 letter.
A few days later, Doug Ford in a letter said Ontarians “cannot afford the crushing impacts of further rate hikes,” adding that the central bank’s 10 rate hikes so far in this cycle have had a “devastating impact on people.”
And on the eve of the Bank of Canada interest rate call, Newfoundland and Labrador Premier Andrew Furey asked Macklem in a letter to “more fully consider the negative impacts” of further interest rate hikes.
While Freeland’s comments “probably made it worse,” Ragan said he isn’t a fan of the premiers’ intervention either.
“It’s unfortunate that the premiers sent their letters because I think it invariably gets politics into the process,” he said.
The Bank of Canada is responsible for administering monetary policy via inflation control and a flexible exchange rate. On a day-to-day basis, the central bank oversees the management of monetary policy, according to its website, and is operationally independent from the federal government.
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In 1991, however, the central bank and the federal government jointly set the inflation target at two per cent with the goal of creating a stable environment for prices. Every five years, the inflation target is reviewed by the Bank of Canada and the Department of Finance, as it was most recently at the end of 2021 when the two per cent target was renewed.
“There are considerable benefits that accrue to a country where the central bank has operational independence and is seen to be independent,” Ragan said. “You are able to control inflation more successfully.”
Others agree that the Bank of Canada’s independence is something worth guarding.
“The central bank’s independence is extremely important,” said Alexander David, professor of finance at the University of Calgary’s Haskayne School of Business.
He said he isn’t necessarily opposed to politicians telling the central bank about the current financial troubles people are experiencing, but he’s worried their comments have the potential to disrupt the central bank’s operations and could “backfire,” especially if loaded language is used to describe the effects of interest rates.
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“Having this sort of commentary coming is useful information; it’s just how it can be communicated better without causing people to lose faith in the central bank’s action to imply that they are somehow crippling the economy,” David said. “That is a direction that I am not too excited about.”
Freeland, Eby, Ford and Furey aren’t the first politicians to openly question the Bank of Canada’s actions.
James Coyne, the second governor of the Bank of Canada, ran into political interference in 1959 when John Diefenbaker, the prime minister back then, took offence to the message Coyne was giving in speeches that the Canadian economy wasn’t as strong as it appeared on the surface.
Rather than tackle the governor head on over his messaging, Diefenbaker created a scandal regarding the pension the central bank governor would receive when he left office.
Coyne eventually resigned from office following a vote in the House of Commons to fire him, even though that decision was shot down in the Senate.
More recently, Pierre Poilievre, while running for the Conservative leadership, said if he were prime minister he would fire Tiff Macklem over his handling of the inflation file.
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Poilievre has since shifted his sights away from Macklem, but a norm has nonetheless been breached, said Christopher Cochrane, an associate professor in the Department of Political Science at the University of Toronto Scarborough.
“If it’s a political hot potato and the parties are suggesting direction to the bank it’s a deviation in a bad way from securing the independence — perceived and actual — of the Bank of Canada,” he said.
However, there is a way back from the events surrounding last week’s rate decision pile on.
“If everyone stops making statements, the problem would slowly go away,” Ragan said.
Too early to think about interest rate cuts: Macklem
What economists say about BoC’s decision to hold rates
Canadians’ view of economy deteriorates: poll
If not?
“If it continues, then who knows where we will end up,” Cochrane said.
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• Email: gmvsuhanic@postmedia.com
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