Sean Kilpatrick
Give the House of Commons finance committee some credit.
After The Globe and Mail reported that the panel had no plans to devote a full hearing to the Bank of Canada's inflation-targeting regime -- despite the fact that it comes up for renewal only every five years and thus is Parliament's only real shot at oversight of monetary policy -- committee members changed their minds.
Members promised last month that before the end of November, they would hold a hearing on the central bank, and specifically on whether Governor Mark Carney and his officials might be better off eyeing additional goals -- namely "full" employment or nominal gross domestic product -- as they set policy, instead of simply trying to achieve an annual inflation rate of about 2 per cent.
On Tuesday, the committee held said meeting, where they heard from a panel of some of the country's leading economists, plus one from the United States. Considering the far-more-visible-than-usual role that monetary policy has played around the world these past few years, shooting the breeze in a public setting with experts about directions that policy makers should take can only be a good thing.
Trouble is, the committee should have done this months ago. At the very least, early enough to avoid the somewhat embarrassing spectacle of holding a hearing on inflation targeting after last week's decision by Mr. Carney and Finance Minister Jim Flaherty to renew their five-year agreement.
In fairness, when Mr. Carney appeared before the committee on Nov. 1 to discuss his economic forecast, a few members did ask him about whether he thought his mandate was sufficient or ought to be tweaked. However, in that testimony, Mr. Carney shot down the idea of targeting either the unemployment rate -- arguing that attempting to do so in the past had had a negative effect on both the labour market and inflation -- or nominal GDP, which he (echoing most economists) said would not be appropriate for Canada.
This should have been a decent clue that neither proposed change was anywhere near the table, and might never be, at least not while Mr. Carney is at the helm.
Once it became clear that the hearing would take place after the bank's mandate was renewed, it should have been equally clear to panel members that they would be doing the public a much better service by focusing their questions and discussion on the elements of the agreement that are at least slightly new and which, as such, could actually impact the way the central bank operates.
Nonetheless, Tuesday's hearing was dominated by questions about -- you guessed it -- adding full employment or nominal GDP to Mr. Carney's mandate. Worse, just about every time the actual details of the newly renewed agreement were brought up, it was by the economists who were present.
To recap, the agreement renewed the 2-per cent target, rejecting new goals or a different way of targeting price gains.
But while the central bank is still mandated to achieve its inflation target above all else, policy makers essentially said the success of that framework over two decades -- and the lessons of the recent crisis -- mean there may be "exceptional" cases where they can complement efforts by regulators and supervisors to keep the financial system stable. The crux of this notion is Mr. Carney's emphasis that the central bank's inflation target is "flexible" -- meaning he has latitude to take longer than usual to return to his target if doing so is needed to buffer the economy against shocks, or to guard against financial imbalances that are building in the system.
This is hardly rocket science, given the painful recovery from the 2007-09 financial crisis and the obvious need to explore ways to prevent another one. It is not shockingly new, either, since the central bank already watches the financial system as it sets policy, and has arguably always had flexibility in how it achieves its target (although none of Mr. Carney's predecessors felt the need to spell this out so clearly, a reflection of the abnormal circumstances in which he's operating).
Mr. Carney has cited this flexibility -- what McGill University economist Chris Ragan calls "constrained discretion" -- several times this year, in the face of criticism for keeping his benchmark interest rate at 1 per cent even amid hotter-than-expected inflation readings. Economists at the hearing, including Prof. Ragan, Toronto-Dominion Bank's Craig Alexander, and Jim Stanford of the Canadian Auto Workers, all praised the central bank's flexibility and nimbleness over the crisis and recovery, agreeing that Mr. Carney has used the tools available to him with aplomb.
And to dispel any notion that the bank was taking its eye off of the inflation ball and elevating financial stability to a status similar to its targeting mandate, Mr. Carney and his team explained last week in a backgrounder that they still believe the first "line of defence" against instability is prudent behaviour by consumers and lenders, and that the second is a regulatory and supervisory approach with a "greater focus on system-wide vulnerabilities." Delaying or speeding up interest rate moves would only be a last resort when those other avenues fail, they suggested.
Still, there are "policy purists" who are uncomfortable with the idea of central bankers even paying lip service to the idea of trying to help tame the financial system, not least because dangerous financial bubbles are hard to identify before they burst. So this is still a pretty grey area, one which could have generated some interesting debate at the committee had members done enough homework to shift tack from their initial plans.