Leaks point to rate con­flict

Ques­tions arise over au­ton­omy of Bank pol­icy

National Post (National Edition) - - FRONT PAGE - TER­ENCE COR­CO­RAN

In the con­text of the his­tory of high con­flicts sur­round­ing the Bank of Canada and mone­tary pol­icy, what we have to­day ap­pears to be a mi­cro dis­pute, or per­haps sim­ply a dis­agree­ment. This is not a 2017 ver­sion of the Coyne af­fair, the 1961 clash in which Bank gover­nor James Coyne was dis­missed by prime min­is­ter John Diefen­baker be­cause the gov­ern­ment didn’t like it when Coyne raised in­ter­est rates.

But we are look­ing at what ap­pears to be an un­usual and sur­pris­ing de­vel­op­ment in the re­la­tion­ship be­tween the Bank of Canada and the Trudeau Lib­eral gov­ern­ment.

The ex­is­tence of a po­ten­tial con­flict was sig­nalled in a Bloomberg News re­port Thurs­day that be­gan with this sen­tence: “Of­fi­cials within Prime Min­is­ter Justin Trudeau’s gov­ern­ment are con­cerned the Bank of Canada is mov­ing too quickly to raise in­ter­est rates, fear­ing higher bor­row­ing costs could in­ad­ver­tently trig­ger a down­turn.”

The plu­ral “of­fi­cials” im­plies more than one per­son within the gov­ern­ment holds the same view that the Bank of Canada’s in­ter­est rate hikes are pos­si­bly pre­ma­ture and could un­der­mine growth.

The of­fi­cials, said Bloomberg, “are con­cerned a se­ries of rate hikes would lead con­sumers to claw back spend­ing, stunt­ing a re­cov­ery from a two-year oil shock.”

The Bank of Canada did not re­spond to the story, al­though the bank’s at­ti­tude to­ward arm­chair quar­ter­back­ing on mone­tary pol­icy from out-of-line politi­cians and their of­fi­cials is al­ready well known.

A lit­tle more than a year ago, Bank Gover­nor Stephen Poloz set the record straight.

“The Fi­nance Min­is­ter, sorry, is not my boss,” said Poloz.

“The Bank of Canada is a fully in­de­pen­dent pol­i­cy­maker, and we op­er­ate with in­de­pen­dence un­der a fiveyear agree­ment with the gov­ern­ment on the in­fla­tion tar­get.”

The cur­rent five-year agree­ment was signed last Oc­to­ber, so Poloz and the Bank are on solid con­trac­tual grounds on the role of the bank as the fi­nal au­thor­ity on set­ting in­ter­est rates.

On the other hand, there are more than a few ar­eas of Cana­dian mone­tary pol­icy that stir the po­lit­i­cal juices of ob­servers and politi­cians. Eco­nomic fore­casts for growth and in­fla­tion are in dis­pute, with many sug­gest­ing the Bank of Canada could be over-fore­cast­ing growth and in­fla­tion.

The “of­fi­cials” clearly have an agenda of some kind that seems tar­geted di­rectly at Poloz’s sug­ges­tions that the key pol­icy rate — raised by a quar­ter point ear­lier in July to 0.75 per cent — will, and should, move higher as the econ­omy picks up steam.

Such pub­lic gov­ern­ment state­ments ques­tion­ing Bank pol­icy are highly un­usual, some might even say dan­ger­ous.

David Lai­dler, pro­fes­sor emer­i­tus at West­ern and a wit­ness to much of Canada’s mod­ern mone­tary his­tory, said the com­ments by Trudeau of­fi­cials are in­deed un­usual. “The last time some­thing like this turned up, at least to my in­creas­ingly weak mem­ory, was in 1999 when the (Fi­nance Min­is­ter Paul Martin and deputy min­is­ter Kevin Lynch) team at fi­nance launched an at­tack by leak on the Bank’s then still se­cret plan to shift mone­tary pol­icy de­ci­sions to fixed dates.”

An­other economist said the of­fi­cials’ com­ments are “se­ri­ously mis­guided.” Finn Posh­mann, CEO of the At­lantic Prov­inces’ Eco­nomic Coun­cil, added, “I imag­ine the state­ment re­flects an hon­estly held opin­ion, but in the Cana­dian con­text it is one that is very odd to see in the press. A per­son should know bet­ter than to say it to a re­porter.”

So maybe that’s all there is to the story, it’s the per­sonal opin­ion of a cou­ple of of­fi­cials.

Or maybe not. There have been other lit­tle sig­nals that the Trudeau gov­ern­ment has a dif­fer­ent view of Canada’s growth and in­fla­tion prospects. Back in June, both Prime Min­is­ter Trudeau and Fi­nance Min­is­ter Bill Morneau seemed un­en­thu­si­as­tic about the idea that the Cana­dian econ­omy was on the up es­ca­la­tor. “We don’t see the value in tout­ing and wav­ing around any given month’s pos­i­tive num­bers when we know the next month might be a slight dip and the month af­ter that might be a slight rise,” said Trudeau last month.

Could it be that the gov­ern­ment fears con­flict­ing mes­sages? While the Bank of Canada talks of growth and curb­ing in­fla­tion, the Trudeau gov­ern­ment re­mains on a deficit-spend­ing binge and has nu­mer­ous “in­vest­ment” poli­cies that at least in part are jus­ti­fied to lift the econ­omy out of a weak growth sit­u­a­tion.

Still an­other re­lated mone­tary pol­icy is­sue is whether the Bank has a firm grip on growth and in­fla­tion fore­casts. Economist Pierre Sik­los, a mem­ber of the C.D. Howe In­sti­tute’s Mone­tary Pol­icy Coun­cil, is­sued a brief memo Thurs­day ex­press­ing con­cern about a “back­lash” against cen­tral banks that take their in­de­pen­dent in­ter­est rate flex­i­bil­ity “too far.”

The memo is a sum­mary of his new book, Cen­tral Bank­ing Into the Breach: From Tri­umph to Cri­sis and the Road Ahead, a cri­tique of cen­tral bank­ing. Ac­cord­ing to the pro­mo­tion ma­te­rial, in the book Sik­los presents rea­sons why “cen­tral bank­ing is a bro­ken sys­tem and what can be done to help re­pair it.”

Sik­los calls for “more con­certed ex­ter­nal re­views of the work of cen­tral banks,” es­pe­cially their fore­cast­ing per­for­mance. “This is not to sug­gest that some kind of witch­hunt is in or­der. Far from it, as this would not serve the in­ter­ests of ei­ther the Bank of Canada or the Gov­ern­ment with whom it jointly re­views the cur­rent in­fla­tion tar­get­ing regime ev­ery five years.”

One would be jus­ti­fied in spec­u­lat­ing whether the “of­fi­cials” quoted by Bloomberg had Sik­los’ work in mind. There will be no re­play of the Coyne witch-hunt, but there are ques­tions.

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