Opinion: The Bank of Canada opened the door to independence questions today on a platform two years ago

Opinion: The Bank of Canada opened the door to independence questions today on a platform two years ago

Bank of Canada Deputy Governor Caroline Rogers attends a press conference in Ottawa on April 13.Blair Gable/Reuters

What was striking about the speech this week by the second Bank of Canada official on the importance of central bank independence was not what she had to say. The bank felt compelled to say that at all.

Senior Vice Governor Caroline Rogers’ speech on Tuesday was largely a civics lesson on how to structure Canada’s central bank to operate: independently of the elected federal government that ultimately oversees it. Much of what she said can be found in public documents that have long been 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 running the country’s monetary policy has been openly challenged by prominent conservative politicians (most notably the party leadership candidate Pierre Boliever and former leader Andrew Scheer). The bank feels the need to defend itself and correct the record.

This issue appears to have found political momentum that can be attributed in large part to the country’s current inflation problems. If the Bank of Canada succeeds in its most important responsibility – to keep inflation low and stable around the 2 per cent target – there likely won’t be much public concern about who ultimately controls policy. But inflation is more than three times the target, and the bank is striving to put out the fire with sharp and rapid increases in interest rates.

There is an audience to question the competence, and even motives, of a central bank that seems to have dropped the ball at the one job most voters care about.

However, the independence questions surrounding the bank did not begin with inflation rising. They were only inflated by him. You can trace this issue back two years to a moment in mid-March of 2020: then-BoC Governor Stephen Poloz took a press conference alongside then-Finance Minister Bill Morneau in a very conscious public display that they were coordinating policy efforts in the face of the coronavirus crisis .

That was the moment when the central bank decided to sacrifice its independence in order to avoid an economic catastrophe. He never fully recovered it.

The consolidated supply may be reassuring to Canadians and financial markets in the midst of extreme turmoil, but it has broken through an important invisible wall. Perceptions of bank independence have been hacked — at least in terms of politics in the era of COVID-19, which is still far from over. Many questions and doubts about the bank’s actions and motives since then are tainted by that moment.

At the time, Mr. Poloz acknowledged that fiscal policy would take the lead in the Canadian crisis rescue plan, with his monetary policy playing a supportive role in maintaining market stability and creating conditions that would aid recovery. It was an entirely realistic position, but nonetheless suggested to some observers, rightly or wrongly, that Mr Morneau and his fellow-elects were the ones to make the decision.

It has certainly distorted perceptions in some quarters about a key component of the Bank of Canada’s response to the crisis – its government bond-buying programme, known as quantitative easing (QE). Under the program, the bank bought hundreds of billions of dollars in 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 big coincidence – as Ms. Rogers made clear in her speech, the 1,000th time the Bank has made this point publicly.

But once fiscal and monetary policymakers showed their cooperation, that coincidence became a very tough sell, particularly among the more skeptical Conservative MPs.

It all played into the sense that the government had begun what amounted to an experiment in “modern monetary theory” – the idea, essentially, that the government could spend huge sums and take on large debts, which would be financed by the central bank issuing its own currency. Although the bank and government denied that methadone was being treated as part of their strategy, it was difficult to weed out.

The public announcement of policy coordination between the central bank and the federal government was a calculated risk: the bank was conceding an undisputed public perception of its independence for what it believed was an important gesture to bolster public and market confidence. In the months since the first joint press conference, many observers have already seen this event, along with the political actions revealed in this display of unity, as an important turning point in the crisis.

To the degree that it helped stave off a major collapse of the economic and financial system, it was most certainly worth it. However, more than two years later, it is clear that the Bank of Canada has spent some valuable credibility and independence on that press conference platform.

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2022-05-04 22:45:55

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