POLOZ PROPERLY IN CONTROL.

Central banking isn’t exactly held in high reverence around the world, especially not in the U. K. where disharmony reigns between Bank of England Governor Mark Carney and Theresa May’s Conservative government. “We are not going to take instruction on our policies from the political side,” Carney said the other day in a sharp rebuke to May’s criticisms of the bank’s low interest-rate policies and quantitative easing. More sparks are set to fly. Carney himself may be set to fly too.

No such squabbling exists in Canada. Harmony reigns between Justin Trudeau’s Liberal government and Bank of Canada Governor Stephen Poloz. Indeed, for all the policymaking craziness in Ottawa — stimulus deficits, raging infrastructurism, pipeline paralysis — the Bank of Canada seems to be keeping its head on its shoulders.

Rather than take political direction, the Bank of Canada announced Monday it reached a professionally amicable agreement with Finance Minister Bill Morneau to extend Canada’s 25- year- old inflation targets — set between one and three per cent — for another five years.

First established by Governor John Crow 25 years ago, the targets have been Canada’s rock of inflation control and stability ever since, and something of a model for the world.

It is somewhat unfair but not totally unreal to suggest that in Canada, it’s the government that takes instructions from the central bank. Which is as it should be.

The sense that Poloz and the bank are in charge of monetary policy is suggested in a Sept. 21 letter ( released Monday by the bank) from Poloz to Morneau. The governor writes: “In preparation for our meeting on 28 September, I am pleased to bring to your attention the Bank of Canada’s recommendation for the renewal of our inflation-control framework.”

As a result of research and analysis, Poloz writes, the bank recommends maintaining the Crow policy objective. The evidence shows “no strong justification to alter the framework at this time.”

What makes the Poloz letter remarkable is the forcefulness of its conclusions on a couple of issues. First, the governor skewered the idea — currently fashionable on the haute economie runways of Paris and Washington — that the world needs higher inflation to stimulate economic activity. Former U.S. Treasury secretary Lawrence Summers has pushed the inflation idea, as have some IMF officials and John Williams, President of the San Francisco Fed. In a speech last month, Williams proposed a return to inflation rates of “between three and four per cent in the United States,” although he said consideration would need to balance the benefits against the costs.

Poloz, in his letter to Morneau, pretty well sends Williams and Summers to the woodshed. Higher inflation, says Poloz, would lead to arbitrary price differentials and a less efficient allocation of resources. The tax system would get distorted. Higher inflation would more likely be borne by low- income and older households. Wage indexing could lead to persistent inflation.

Poloz also took on other haute economie fads that “have recently received media attention.” One calls for adoption of Nominal Gross Domestic Product (NGDP) targeting (also backed by Williams), in which the bank targets real growth plus the inflation rate.

Under NGDP targeting, if Canada had six per cent growth, it would not matter if the mix were two per cent real growth and four per cent inflation. Among other things, Poloz points out that such a target would be confusing to consumers and investors and could, in certain circumstances, lead to higher average inflation rates.

Another fad Poloz skewers is the idea that the bank should target the price level rather than inflation. That is: if prices should rise by only one per cent or even decline, the bank should aim to raise inflation so that the overall average rate over the long term is always two per cent. The bank shot that idea down in 2011 prior to the last renewal of the inflation target, but for some reason Poloz felt it necessary to do it again in his letter.

While the bank seems to be clearly in firm control of Canadian monetary policy, there are some politics involved. The new agreement with the government opens by stating “The primary objective of Canada’s monetary policy is to promote the economic and financial welfare of Canadians by contributing to sustained economic growth, rising levels of employment and improved living standards.”

That’s not what the Bank Act says, nor is it the objective outlined by the bank in the past. In 2013, John Murray, then deputy governor, established the limits to the bank’s economic role. “Monetary policy in Canada has one objective — achieving and maintaining a low, stable and predictable level of inflation.”

What does the expansion of the definition of monetary policy mean? John Crow, among others, would like to ask Poloz: “Why did you change it? What are you getting at?”

In an interview, Crow said the expanded set of objectives “does kind of emphasize growth as opposed to stabilization, which is not probably monetary policy’s strong suit.” Monetary policy — low inflation, stability — is not what one thinks of when one thinks of growth, employment, and rising living standards. “That all depends on productivity ( brought on by) incentives, fiscal policy, innovation” and other factors that are outside the purview of central bankers.

Still, compared with the central- bank wars in Europe and elsewhere, Canada is a model of stability, with the bank firmly in control.

FOR ALL THE POLICYMAKING CRAZINESS IN OTTAWA, THE BANK OF CANADA IS MOSTLY KEEPING ITS HEAD ON.