Politicians should let the Bank of Canada do its job

The Bank of Canada's aggressive interest rate hikes, intended to bring inflation down from the high rates of the COVID-19 era, have produced a perhaps unsurprising negative response from elected officials at both the provincial and federal levels. Is this political criticism of the Bank of Canada merely healthy discourse, or does it threaten the hard-won independence of Canada's central bank? Conflict between government officials and the Bank of Canada (BoC) is certainly not new. For example, in 1961, a policy conflict between the Diefenbaker government and then-BoC governor James Coyne culminated in the governor's resignation. But the general consensus among economists is that central bank independence is necessary for good inflation control. Excessive control of central banks by governments has sometimes been at the root of hyperinflations—inflation rates running at several hundred per cent per month, or more—in the 1920s in Europe, and more recently in South America, for example. But, though an independent central bank is a good thing, central bank officials are not democratically elected, so their power is limited by legislation. In Canada, the Bank of Canada Act puts constraints on what the BoC can do. For example, the bank cannot engage in fiscal policy—it cannot tax and spend. Stephen Williamson is the Stephen A. Jarislowsky Chair in Central Banking at Western University's department of economics. Photograph courtesy of Stephen Williamson Provincial premiers including, most notably, Ontario Premier Doug Ford, have recently engaged in criticism of the Bank of Canada with calls for reductions in interest rates. Prime Minister Justin Trudeau has tried a more mild form of criticism, stating that "we're optimistic that the Bank of Canada will start bringing down interest rates sometime this year," while emphasizing the BoC's independence. But what has stood out in recent Canadian political discourse are the public comments of the federal leader of the opposition, Pierre Poilievre. He has gone so far as to promise that he will fire the current governor of the Bank of Canada, Tiff Macklem, should he become prime minister of Canada. What exactly is Poilievre's beef with the Governor? Poilievre is quoted as saying that "he's supposed to be in charge of monetary policy and not fiscal policy. And he printed the money to fund those deficits, and he did so in an inflationary environment. And that is why I believe he needs to be replaced." Polievre's suggestion is that the Bank of Canada strayed from its mandate during the global pandemic, and that its policies acted to increase the inflation rate. But what the bank was doing between March 2020 and the end of 2021 was not "printing money" in the usual sense. This was an exercise in large-scale asset purchases or "quantitative easing," whereby the BoC bought long-maturity Government of Canada securities (primarily) by issuing interest-bearing settlement balances, or bank reserves. These settlement balances are not "money," in that they just sit, and are not used by consumers and businesses to purchase goods and services. Settlement balances are used for transactions among banks, but only a small quantity of such balances is needed to support all Canadian interbank exchange on any given day. Large-scale asset purchases by central banks in other countries—in the United States from 2008 to 2014, and in Japan, for example—had no discernible effects on inflation. Poilievre's criticisms of the Bank of Canada are reckless, even more so for being ill-informed. There are instances, of course, when central bankers need and deserve criticism. Certainly the BoC's policies since early 2020 have been far from perfect, and should be analyzed carefully and criticized. Nevertheless, Bank of Canada policy under its current leadership is correctly directed at achieving the goals laid out in the bank's most recent 2021 agreement with the federal government. Further, BoC policy currently does not stand out in any way relative to that of other central banks in the world. Canada's politicians would be best advised, for the time being, to keep quiet, and let the Bank of Canada do its job. Stephen Williamson is the Stephen A. Jarislowsky Chair in Central Banking at Western University's department of economics. He has held academic positions at Queen's University, the University of Iowa, and Washington University in St. Louis. As well, he has served as an economist at the Bank of Canada, the Federal Reserve Bank of Minneapolis, and was a vice-president at the Federal Reserve Bank of St. Louis. The Hill Times