BOC, Finance need to align stories
Some think the Bank of Canada might be consciously enabling Prime Minister Justin Trudeau’s spending habits by purchasing billions of dollars’ worth of government debt each week with newly created money.
“We will be watching the Bank of Canada with great skepticism,” Pierre Poilievre, the Opposition finance critic, told Bloomberg News last month, adding that the central bank "should not be an ATM for Trudeau’s insatiable spending appetites.”
T hose comments will h av e bothered a lot of people. Poilievre politicized a Crown institution that worries a great deal about its independence from the whims of partisan politics. Much of its credibility relies on the assumption that policy- makers will set interest rates based on economic conditions, not the electoral needs of their political masters.
“We’ve been very clear from the start as we’ ve taken these exceptional measures that they’re focused on achieving our inflation target,” Macklem said at a press conference on Oc t. 28 when asked about Poilievre’s comments. “That is what’s guiding us.”
It’s unlikely that response will satisfy doubters such as Poilievre, and, frankly, why should it?
Macklem, like his predecessor, Stephen Poloz, emerged as governor from an opaque hiring process that left a dusting of political intrigue. Poloz, who was hired by Poilievre’s former boss, Stephen Harper, had to endure years of speculation by conspiratorial Liberals that he had promised Harper a low dollar, among other things.
Now it’s Macklem’s turn to navigate the mist of conspiracy that has become part of the job of a modern central banker. Central bankers should no longer assume they will be held in high esteem or automatically granted respect. They have to earn it, as Jerome Powell has done in the United States, despite disappointing President Donald Trump on multiple occasions.
To be sure, the government isn’t making it easy for Macklem to prove that he’s his own man.
Chrystia Freeland chose to give her first major policy speech as finance minister on Oct. 28, the same day the Bank of Canada released its latest policy decision and quarterly economic report.
There’s an unwritten rule that the central bank and the finance minister should try to avoid stepping on each other’s toes. The reason: it’s easy for a central banker and a finance minister who are out of sync to create confusion, which is exactly what ended up happening with Freeland and Macklem.
The finance minister stole the Bank of Canada’s thunder and violated etiquette by directly commenting on monetary policy. “There was broad international agreement that, with interest rates approaching zero, monetary policy is running out of bullets,” Freeland said, reflecting on the recent annual meetings of the International Monetary Fund and World Bank. “That puts the onus squarely on fiscal policy to grow our way out of this recession.”
That’s not the message Macklem sent earlier in the day, when he said that monetary policy still had lots of pop. “There is scope to do more, and if we need to do more we will do more,” he said.
Central banks aren’t “out of bullets,” leaving governments with no choice but to spend like mad. For example, the Reserve Bank of Australia unleashed a new volley on Tuesday, including a promise to purchase bonds worth Australian $ 100 billion. The Bank of Canada could still do any number of things, according to its official “toolkit” of emergency policies: boost the size of its bond purchases; target those purchases in such a way that would lower specific interest rates along the yield curve; encourage banks to lend to smaller companies; or even drop the benchmark interest rate below zero, as some European central banks have done.
The problem isn’t that central banks lack ammunition, but that they don’t develop vaccines, operate hospitals, administer unemployment insurance or make investment decisions. At times like these, government spending has to fill the void because companies and households either can’t or won’t. As Gita Gopinath, chief economist at the International Monetary Fund, pointed out this week, governments must run up debt to break out of a “global liquidity trap,” a condition in which interest rates aren’t a barrier to investment because they are already plenty low.
The next few years could challenge our understanding of how the central bank and government are supposed to work together. The Bank of Canada’s official position is that it takes fiscal policy as a given, but surely it would benefit from understanding how the federal government plans to fight the pandemic. Critics could resist the urge to assume interest-rate policy is being run out of the Prime Minister’s Office just because Macklem and Freeland show up at a press conference together. We’re in a war. Normal might not apply.
Independence is a delicate thing, though. The Bank of Canada’s main news last week was that it would reduce its weekly purchases of federal debt to $ 4 billion from $ 5 billion, while putting greater emphasis on longer- dated securities. The announcement might have helped Macklem assuage critics such as Poilievre, except Freeland created the impression a few hours later that the Bank of Canada was doing exactly what she wanted. “We are locking in those low costs by issuing more debt into longer- term instruments, at these historically low rates,” she said.
It was likely an innocent remark, and probably optimal policy. But it didn’t look good. The Bank of Canada and Finance should get their stories straight. It would be easier to have confidence in them that way.