FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File PhotoChris Wattie/Reuters
For years, independent Senator Diane Bellemare of Quebec has quietly agitated for changes in the way the Bank of Canada conducts monetary policy. Now, with the central bank pushing interest rates to new heights in its war on inflation, she has made her campaign considerably louder.
Last week, Ms. Bellemare introduced in the Senate a bill that would dramatically overhaul the Bank of Canada Act. The legislation entered second reading this week.
Among other things, the economist proposes that the power to make interest-rate decisions be taken out of the hands of the bank’s Governing Council (made up of the governor and his deputy governors) and entrusted to a new body dominated by independent experts from outside the bank. The bill also seeks to entrench a dual mandate of both inflation control and “full employment” in the legislation.
The bill – coming from outside the governing party and snaking its way through the Senate, rather than coming through the legislative front door of the House of Commons – is an extreme long shot to ever become law. It would be easy to dismiss it as an attempt at political overreach into a central bank that has become a lightning rod for public dissatisfaction and distrust, as inflation soared and the bank’s response – punishing interest-rate increases – have placed Canadians’ finances in a vice grip.
But taken at its face value, this very likely doomed bill could provide a starting point for a healthy conversation about the role of monetary policy in guiding the national economy, and the best practices for implementing it. It’s not a terrible idea to ask if there are better ways to do what the Bank of Canada has been trying to do, without those questions necessarily implying that politicians want to undermine the cherished independence of the central bank.
“I have no hidden agenda,” Ms. Bellemare said in an interview Wednesday. “This is all about a dialogue that we have to create.”
She argues that the country needs “a co-ordination of policy tools” to meet the conflicting economic challenges that we face, rather than relying so heavily on a monetary policy laser-focused on inflation control at the expense of other priorities.
“This is a way to start engineering our fiscal and monetary policy a bit differently, without having the risk of monetary policy being considered politically oriented,” she said. “The external committee is a guarantee that these discussions and decisions are made independently of partisan politics.”
Ms. Bellemare’s proposal of a largely external policy-setting committee was patterned after a similar recommendation earlier this year from a panel reviewing the Reserve Bank of Australia, which had come under heavy political pressure for perceived policy failures and lack of transparency in the wake of the COVID-19 pandemic.
Carolyn Wilkins, a former senior deputy governor at the Bank of Canada, was a member of that Australian review panel. But she’s not convinced Canada should consider a similar route, noting the very different histories and existing processes between the two central banks. (For starters, the RBA doesn’t have anything quite like the Bank of Canada’s internal committee of policy-setting experts, the Governing Council, made up of the governor and his deputy governors.)
“I know how rich the debate can be in the Bank of Canada’s Governing Council,” said Ms. Wilkins, who now teaches economics at Princeton University and is an external member on the Bank of England’s financial policy committee. “That said, I think there is considerable value from including non-executive, external viewpoints in monetary policy decisions.”
The Bank of Canada took a step in that direction earlier this year, adding its first external, non-executive deputy governor to the Governing Council. The bank also addressed a key concern about the transparency of its decision-making process, introducing a new summary of deliberations that discloses the key elements of the Governing Council’s discussions and rationale for each rate decision.
Still, its policy decisions are overwhelmingly an internal, behind-closed-doors process, and the new summaries fall short of the detailed meeting minutes many of its global peers publish.
And, notably, the bank’s evolution not just over the past several years, but several decades, has been achieved outside of its legally enshrined obligations in the Bank of Canada Act, which is now nearly 90 years old. Many of the bank’s firmly established practices – its central objective of inflation targeting, the structure of its policy-setting council, its communications obligations, even the five-year renewals of its mandate agreement with the government – aren’t entrenched in the act itself.
It’s a legitimate question whether the Bank of Canada Act is long overdue for a re-think. Perhaps the loose framework has been useful to accommodate a flexible central bank that can evolve without the need to be revisited by legislation. Alternatively, perhaps the bank could benefit from renewed legislative scrutiny to enshrine its best practices and provide fresh guidance to help shape its future.
Whether Ms. Bellemare’s model is a useful one is open for debate. But that’s a debate worth having. One thing that has become abundantly clear over the past few years is that the Bank of Canada wields tremendous economic power. It’s not unreasonable to re-examine how we want, even need, that power to be legally defined.