Selection of central bank chief may raise questions about independence

The Globe and Mail

Canada’s Finance Minister Jim Flaherty, incoming Bank of Canada governor Stephen Poloz and outgoing governor Mark Carney pause before walking to a news conference announcing Mr. Poloz’s appointment in Ottawa on May 2, 2013. (CHRIS WATTIE/REUTERS)

The decision of the Harper government to name an outsider as the next governor of the Bank of Canada will raise uncomfortable questions over the sacrosanct independence of the central bank.

That’s not to suggest that Stephen Poloz isn’t qualified for the key position, only that he comes to the job with that hanging over his head.

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It’s not just that Mr. Poloz has been away from the Bank of Canada for years, but also that Finance Minister Jim Flaherty took an unusual route, and then chose to skip over the universal favourite, Tiff Macklem, who is currently the senior deputy governor.

“It may change peoples’ perception of the independence of the bank,” said Walid Hejazi, associate professor of international business at the University of Toronto’s Rotman School of Management.

"Tiff has an outstanding international recognition through his work within the G20 as the deputy minister of finance - Poloz cannot match that in my opinion,” added Thorsten Koeppl, associate professor of eocnomics at Queen’s University in Kingston, Ont., and a former economist at the European Central Bank.

“Jim Flaherty has some explaining to do for why Tiff was not chosen -- otherwise red flags will go up about the independence of the Bank of Canada."

The job of finding a Bank of Canada governor actually lies with the central bank’s board of directors, which interviews candidates and then presents its recommendation to the finance minister.

However, this time around, Mr. Flaherty in January issued a news release saying that he would be interviewing a short list of potential governors. He actually did that in 2007, as well, but without the fanfare.

“Modern spin and the tradition of central bank independence don’t sit well together,” said William Robson, president of the C.D. Howe Institute, an economic policy think tank in Toronto. “The scrutiny is going to be more intense because the natural candidate was so strong and the minister made himself so visible in the process.”

Mr. Poloz won strong reviews after the announcement Thursday that he would replace Governor Mark Carney, who is leaving for the Bank of England this summer.

He is a respected economist with a PhD from the University of Western Ontario who, in fact, worked at the Bank of Canada for the first 14 years of his career.

Most recently, he has been chief of Export Development Canada, a Crown corporation that finances and insures exports, and, in fact, oversaw the expansion of EDC’s power to do more domestic lending.

But there were questions given that Mr. Poloz hasn’t been directly involved with monetary police since he left the central bank almost 20 years ago, and lacks the front-line experience fighting the financial crisis that Mr. Macklem gained.

Mr. Poloz could also be seen as favouring the government’s aggressive trade agenda, given his most recent job.

It was the uncertainty, and not knowing his views on monetary policy, that caused a small dip in the Canadian dollar, though he said Thursday he favoured the Bank of Canada’s current approach.

“The uncertainty around his views on monetary policy, financial stability and the Canadian economic growth outlook, combined with his experience at EDC (that would be viewed as export-friendly) caused an initial weakening in [the Canadian dollar],” chief currency strategist Camilla Sutton of Bank of Nova Scotia said Friday.

Bay Street economists believe some of the talk surrounding Mr. Poloz is unfair, given both his chops and the central bank’s primary job of keeping inflation in check.

“The appointment of an ‘outside’ candidate will likely raise some uncertainty as to the future course of monetary policy,” said assistant chief economist Paul Ferley of Royal Bank of Canada.

“There may also be a tendency to assume that someone coming from an organization such as the EDC, which is focused on promoting external trade, will slant monetary policy in a similar direction particularly with respect to the exchange rate,” he said in a research note.

“However, this would do a disservice to Poloz’s early career at the central bank where the priority is to set monetary policy to achieve an appropriate rate of inflation. Our expectation is that monetary policy under Poloz will remain focused on strengthening growth to a rate the puts greater downward pressure on the unemployment rate with the objective of maintaining inflation at the 2-per-cent midrange target.”

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