Bank of Canada Governor Tiff Macklem holds a press conference at the Bank of Canada in Ottawa on July 12.Sean Kilpatrick/The Canadian Press
Bank of Canada Governor Tiff Macklem warned three provincial premiers last month that their calls for a stop to interest-rate hikes could undermine public confidence in the independence of the central bank.
In early September, the premiers of Ontario, British Columbia and Newfoundland and Labrador sent public letters to Mr. Macklem urging him to stop tightening monetary policy. Ontario Premier Doug Ford followed up with a second letter this past weekend, asking the bank to hold off rate hikes at its coming rate decision on Wednesday.
Mr. Ford issued this second call despite receiving a letter from Mr. Macklem on Sept. 13, in which the central bank governor expressed concern about interventions from premiers, which he said could create a perception of political interference with the bank. The contents of Mr. Macklem’s letter were first reported by The Canadian Press on Tuesday.
The central bank sets interest rates and makes other monetary policy decisions independently from the government. This allows it to make politically unpopular decisions that are sometimes needed to keep inflation under control.
“While I am very pleased to get your perspectives on the impact of our policy decisions, instructions or requests from elected officials about how we should set interest rates could create the impression that the Bank of Canada’s operational independence is at risk,” Mr. Macklem wrote in identical letters sent to Mr. Ford, B.C. Premier David Eby and Newfoundland Premier Andrew Furey.
Schembri: Canadian politicians should leave monetary policy to the Bank of Canada
“I am sure you agree that this would be unfortunate,” Mr. Macklem wrote. “Operational independence is critical to the legitimacy of the central bank, and to the effectiveness of monetary policy as a means to achieve price stability.”
Over the past two years, politicians from across the political spectrum have criticized Mr. Macklem and his team, first for failing to foresee and prevent the rise of inflation, then for rapidly increasing Canadian interest rates to get prices back under control.
The aggressive monetary policy tightening campaign is helping bring down inflation, which has fallen from an annual rate of 8.1 per cent last summer to 3.8 per cent in September. But it’s also squeezing household budgets, raising mortgage expenses and pushing up unemployment – all while sharply increasing government debt-servicing costs.
Mr. Macklem has long argued that restoring price stability is worth the economic costs.
“While it’s true that if we hadn’t raised interest rates, the interest rates on a mortgage might be lower today, it’s also true that inflation would be a much bigger problem. Unfortunately, there is no pain-free way to get total inflation back to target,” Mr. Macklem said in his letters to the premiers.
Mr. Ford appears to have ignored Mr. Macklem’s request to refrain from commenting on monetary policy. In his second letter, published online on Sunday, the Ontario Premier once again called on the bank to stop raising interest rates.
“While you have said that these crushing increases are necessary to combat inflation, that justification is wearing thin,” Mr. Ford wrote. “I want to reiterate my call for the Bank of Canada to refrain from any interest rate increases and instead provide certainty and relief to Canadians who have been hurt by previous hikes.”
The bank is already widely expected to hold its policy rate steady at 5 per cent on Wednesday, following an unexpected decline in inflation last month and growing signs that Canada’s economy is stalling. Financial markets are pricing only a 15-per-cent chance that the bank will raise rates this week.
Stephen Gordon, an economics professor at Laval University, said that the interventions by premiers don’t pose a significant risk to central bank independence. “Concerns about political interference in the workings of the Bank of Canada aren’t really pertinent if the politician in question has no legal authority to influence the bank’s decisions one way or another,” he said in an e-mail.
More problematic, he said, were comments from federal Finance Minister Chrystia Freeland after the bank’s last rate decision. She called the decision to hold rates steady a “welcome relief for Canadians” and said that her top priority was “to use all the tools at my disposal … to ensure that interest rates can come down as soon as possible.”
The Finance Minister does have the power to order the Bank of Canada to change its monetary policy, although he or she must do so in writing. The power has never been used, and economists generally consider it a nuclear option that would prompt the resignation of the central bank governor and send shockwaves through the country’s financial system.
“Characterizing it as a ‘welcome relief’ was a not-particularly-subtle hint about what she’d like the bank to do,” Mr. Gordon said. “Again, the difference here is that she has the legal authority to make her opinions stick, in a way that premiers don’t.”
Ms. Freeland has said repeatedly that she respects the independence of the Bank of Canada, and that the government is focused on using other levers, outside monetary policy, to help bring down inflation. Last month, the government announced tax relief for rental housing developers in the hope of boosting construction, and it has introduced several measures aimed at increasing competition among grocery chains to lower food prices.
Federal opposition politicians have gone further in their critiques of the central bank. Conservative Party Leader Pierre Poilievre said repeatedly during his leadership campaign last year that he would fire Mr. Macklem if the Conservatives formed government. NDP leader Jagmeet Singh has argued that the bank’s approach to fighting inflation is causing more harm than good. The NDP’s director of communications, Alana Cahill, said last month that the government should ask the central bank to stop rate hikes.
The government sets the central bank’s mandate and inflation target every five years, and it appoints the governor and senior deputy governor. But the norms of central bank independence dictate that the government doesn’t get involved in day-to-day decisions by the central bank.
This principle isn’t widely understood by Canadians. A recent poll by Abacus Data found that 41 per cent of Canadians think the federal government has control over interest rates, either directly or by issuing orders to the Bank of Canada. A further 18 per cent did not know how interest rates are set.