Anchors aweigh! Corcoran,

Another big day on the central banking beat as the Bank of Canada on Wednesday announces its interest rate decision and issues another quarterly Monetary Policy Report, perhaps the most reliable overview of the Canadian economy as it heads into month eight under COVID-19 lockdown stress.

The last monetary report in July was a grim synopsis of looming economic decline. To quote one passage: “The large declines in both demand and supply are extraordinary. Over a longer horizon, the pandemic could cause large and lasting changes in consumer preferences and other sources of demand. Similarly, the scope of possible structural changes to a post-pandemic economy is vast, and the timing of adjustments will remain unknowable as long as COVID-19 continues to be a threat.”

That was the good news back in July. The bank said the human and economic costs of the pandemic would have been “considerably worse if the containment measures had not succeeded in flattening the curve.” As we now know, the great COVID curve has not been flattened as promised.

The COVID curve is now beginning to look more like a roller-coaster heading up a steep climb — at least in terms of reported COVID-19 cases. In terms of deaths, the curve has in fact flattened, which raises the question that nobody in government wants to ask, let alone answer: If deaths are under control, why are the economic constrictions continuing?

The bank also said in July it would be providing “a more detailed analysis of its long-run assumptions” in this week’s October report. Aside from its economic assumptions, the bank will also have to disclose at least some of its assumptions about fiscal policy and monetary policy and the connection between the two as they continue to print and spend money to fight the pandemic.

One big question: At what point does the central bank wave a warning flag over the need to flatten the curve of Canada’s soaring federal and provincial government debt?

The question seems especially relevant in light of Prime Minister Justin Trudeau’s announcement on Monday that he and his finance minister, Chrystia Freeland, are operating without a “fiscal anchor,” which suggests Ottawa will continue spending “whatever it takes.”

In Ottawa, it’s anchors aweigh! The federal government is a free- sailing ship running out to sea without any sense of where it’s going. That impression grew more plausible as Capt. Trudeau outlined his fiscal law of the sea: “COVID is going to be expensive. The question is who is best positioned to bear these additional costs, and we don’t feel it’s businesses, we don’t feel it’s ordinary Canadians.”

Huh? The implication is that government deficit spending comes out of the ether and will never have to be supported by businesses or individual Canadians. Who needs a fiscal anchor when nobody will have to bear the burden? With that in mind, the Trudeau Liberals plan even more spending. “At the end of the pandemic, once we’ve got the vaccine, there is going to be a need for stimulus — we’ve seen other countries do it — to kick- start our economy into gear and get it growing back. That, of course, will be a onetime investment that we need to target to make sure everybody is benefiting from this relaunch as we get roaring back.”

That promise of post- pandemic stimulus is consistent with media reports that the Liberals plan on a long-term spending streak that could run deep into the next year. Among the itemized priorities are said to be daycare, pharmacare, the environment, housing and transit.

This is where the Bank of Canada comes in. Will the bank’s governor, Tiff Macklem, follow the path taken by U.S. Federal Reserve Chairman Jerome Powell, who has called for more government spending — on top of massive Fed monetary policy — to stimulate the U. S. economy? In a speech earlier this month, Powell said, “The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.”

Out of the woods? How about lost at sea without an anchor? The lost anchor metaphor also applies to monetary policy and inflation targets. The Fed under Powell recently adopted a new approach to inflation targeting that would allow for higher price increases over time if higher inflation is the price to pay for more jobs and growth.

Where Canadian monetary policy stands going forward is yet to be determined. The Bank of Canada’s two per cent inflation-target mandate is coming up for renewal next year. As monetary economist Steve Ambler and Jeremy Kronick write elsewhere on this page, Ottawa and the bank “need to recommit to the two per cent inflation target so that investors, both domestic and foreign, know that the debt they hold will not be inflated away.”

Since Ottawa has already abandoned any fiscal anchor, the maintenance of a monetary policy inflation anchor becomes all the more important.

How much debt is too much? Trudeau isn’t counting. The Bank of Canada should.