What was striking about the speech this week from the Bank of Canada’s No. 2 official on the importance of central-bank independence wasn’t what she had to say. It was that the bank felt compelled to say it at all.
Senior deputy governor Carolyn Rogers’s address Tuesday largely amounted to a civics lesson on how Canada’s central bank is structured to operate: independently from the elected federal government that ultimately oversees it. Much of what she said could be found in public documents that have long existed on the Bank of Canada and government websites.
It was the context of the speech that mattered more than the content. The bank’s credibility as a truly independent actor administering the country’s monetary policy has been repeatedly publicly challenged by prominent Conservative politicians (most notably, party leadership candidate Pierre Poilievre and former leader Andrew Scheer). The bank feels a need to defend itself and correct the record.
That this issue seems to have found political traction can be attributed in no small part to the country’s current inflation problems. If the Bank of Canada was succeeding in its most important responsibility – to keep inflation low and stable around a 2-per-cent target – there likely wouldn’t be much public concern about who is ultimately pulling the policy strings. But inflation is running at more than triple the target, and the bank is scrambling to douse the fire with alarmingly steep and rapid interest-rate increases.
There’s an audience for questioning the competence, and even the motives, of a central bank that appears to have dropped the ball on its only job that most voters care about.
Still, the independence questions surrounding the bank didn’t begin with the rise of inflation; they were merely amplified by it. You can trace this problem back two years to a moment in mid-March of 2020: Then-Bank of Canada governor Stephen Poloz took a press conference podium side by side with then-finance minister Bill Morneau in a very conscious public display that they were co-ordinating policy efforts in the face of the COVID-19 crisis.
That was the moment that the central bank decided to sacrifice its independence in the name of staving off an economic catastrophe. It has never entirely gotten it back.
The unified show may have been comforting to deeply rattled Canadians and financial markets in the midst of severe turmoil, but it breached an important invisible wall. Perceptions of the bank’s independence – at least around policy in the COVID-19 era, which is still far from over – were compromised. A good deal of the questions and suspicions about the bank’s actions and motives since then have been coloured by that moment.
At the time, Mr. Poloz acknowledged that fiscal policy would take the lead on Canada’s crisis rescue plan, with his own monetary policy playing more of a supporting role in maintaining market stability and setting the conditions that would aid in the recovery. It was an entirely realistic stance to take, but it nevertheless suggested to some observers, rightly or wrongly, that Mr. Morneau and his elected colleagues were calling the shots.
It has certainly tainted perceptions in some quarters about a major component of the Bank of Canada’s crisis response – its government bond-buying program, known as quantitative easing (QE). Under the program, the bank bought hundreds of billions of dollars of federal government debt; at the same time, the government spent a remarkably similar amount on emergency relief programs for workers and businesses. It was, essentially, a very large coincidence – as Ms. Rogers explained in her speech, the umpteenth time that the bank has publicly made that point.
But once the fiscal and monetary policy-makers had made a show of their co-operation, that coincidence has become an awfully tough sell, especially among the more suspicious Conservative members of Parliament.
It all played into a sense that the government had launched into what amounted to an experiment in “modern monetary theory” – the notion, essentially, that government can spend vast sums and incur large debts, which is to be financed by the central bank as the issuer of its own currency. Despite denials by the bank and the government that MMT was ever part of their strategy, it’s been a hard charge to shake.
The public declaration of policy co-ordination between the central bank and the federal government was a calculated risk: The bank was ceding the unquestioned public perception of its independence in exchange for what it believed would be an important gesture to buttress public and market confidence. In the months after that first joint press conference, many observers did indeed see that event, together with the policy actions unveiled in that show of unity, as an important turning point in the crisis.
To the degree that it helped stave off a major economic and financial-system meltdown, it was absolutely worth it. Nevertheless, it’s evident, more than two years later, that the Bank of Canada cashed in some valuable credibility and independence on that press-conference podium.
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