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 impact on its citizens, causing some experts to be concerned about the central bank’s independence in terms of monetary policy. .
“Everyone should shut up,” Christopher Ragan, founding director of the Max Bell School of Public Policy at McGill University in Montreal, said last week following comments by Chrystia Freeland and the three premiers regarding the Bank of Canada’s interest rate freeze.
“The central bank’s decision to keep 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. “My number one priority is to use all the tools at my disposal, and work with partners at other levels of government across Canada, to ensure that interest rates can get down as quickly as possible.”
Freeland said she respects the Bank of Canada’s independence, but others are not so convinced.
“Frankly, I would have thought the federal Treasury Secretary would have known better than to express such views,” Ragan said. “Saying you are relieved the Bank of Canada did not raise interest rates might lead one to wonder, ‘Did the federal finance minister put pressure on the Bank of Canada?’”
Freeland was not the only politician to express her views. The prime ministers of British Columbia, Ontario and Newfoundland and Labrador also weighed in just days before the central bank’s decision.
BC Premier David Abiy asked Macklem in a letter to consider whether “people are being harmed” due to the rising cost of borrowing money.
“In your role as governor, I urge you to consider the full humanitarian impact of a rate increase and not increase rates further at this time,” he said in his Aug. 31 letter.
A few days later, Doug Ford said in a letter that Ontarians “cannot afford the devastating impact of further rate hikes,” adding that the central bank’s 10 rate hikes so far this cycle would have a “devastating impact on people ” Is kept.
And on the eve of the Bank of Canada interest rate call, Newfoundland and Labrador Premier Andrew Furey in a letter asked Macklem to “more fully consider the negative impacts” of further interest rate hikes.
While Freeland’s comments “probably made it worse”, Ragan said he is not a fan of the premier’s interference.
“It’s unfortunate that the prime ministers sent their letters because I think that always adds politics to the process,” he said.
The Bank of Canada is responsible for administering monetary policy through inflation control and a flexible exchange rate. According to its website, on a day-to-day basis, the central bank oversees the management of monetary policy, and is operationally independent from the federal government.
However, in 1991, the central bank and the federal government jointly set an inflation target of two percent 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 recently as late 2021 when the two per cent target was renewed.
“There are a lot of benefits to a country where the central bank has the freedom to operate and is considered independent,” Ragan said. “You’re able to control inflation more successfully.”
Others agree that the independence of the Bank of Canada must be protected.
“The independence of the central bank is extremely important,” said Alexander David, a professor of finance at the Hasken School of Business at the University of Calgary.
He said he is not necessarily opposed to politicians telling the central bank about the current financial troubles people are experiencing, but he is concerned that their comments have the potential to disrupt the central bank’s operations and This may cause “backlash”, especially if foul language is used to describe the effects of interest rates.
“It is useful information to have comments like this; “It’s just how can this be communicated better, without making people lose confidence in the central bank’s actions without thinking they are somehow crippling the economy,” David said. “It’s a direction I’m not very excited about.”
Freeland, Eby, Ford and Fury are not the first politicians to openly question the Bank of Canada’s actions.
James Coin, the second Governor of the Bank of Canada, faced political interference in 1959 when then-Prime Minister John Diefenbaker objected to the message Coin was delivering in speeches that the Canadian economy was not as strong as it appeared. on the surface.
Instead of dealing with the governor directly over his message, Diefenbaker created a scandal regarding the pension that central bank governors receive when they leave office.
Coyne ultimately resigned from office after the House of Commons voted to fire him, even though that decision was overruled in the Senate.
More recently, while running for the Conservative leadership, Pierre Poilievre said that if he were Prime Minister he would fire Tiff Macklem over his handling of the inflation file.
Christopher Cochrane, an associate professor in the political science department at the University of Toronto Scarborough, said Poilievre has since turned his attention away from Macklem, but a norm has still been violated.
“If this is a political issue and the parties are directing the bank then this is a misguided distraction from securing the independence – perceived and real – of the Bank of Canada,” he said.
However, there is a way to bounce back from the events surrounding last week’s rate decision pile.
“If everyone stopped making statements, the problem would slowly go away,” Ragan said.
“If this continues, who knows where we’ll end up,” Cochrane said.
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