Leaks point to rate conflict
Questions arise over autonomy of Bank policy
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.