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Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers arrive to testify at a parliamentary finance committee meeting in Ottawa on April 25.BLAIR GABLE/Reuters

The Bank of Canada has ramped up efforts to defend its credibility amid soaring inflation and pointed criticism from Conservative politicians who say it has lost its independence from the government.

Senior deputy governor Carolyn Rogers used a speech in Toronto on Tuesday to explain the mechanics of central bank independence and argue that monetary policy remains free of undue government and private-sector interference. She acknowledged, however, that public confidence in the bank has taken a hit during the COVID-19 pandemic.

“Public trust is fundamental to our ability to deliver on our mandate,” she said in her first speech since becoming the bank’s second-in-command in December.

“We are acutely aware that, with some of the extraordinary actions we have taken during the pandemic and with inflation well above our target, some people are questioning that trust.”

The Bank of Canada has come under fire in recent months as inflation has accelerated to a three-decade high. Many Bay Street analysts have said the bank waited too long to begin raising interest rates, undermining its credibility as an inflation-fighter and increasing the risk that people will start expecting permanently higher inflation.

Conservative politicians, meanwhile, have made monetary policy a political issue in a way not seen in decades, criticizing the bank’s actions during the pandemic. Conservative leadership candidate Pierre Poilievre has led the charge, calling the bank “financially illiterate” and saying it acted as an ATM for Ottawa by buying more than $300-billion worth of government bonds as the government was raising record amounts of money in the bond market.

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Mr. Poilievre said last week that if he were prime minister, he would have the Auditor-General audit the central bank (alongside a private sector accounting firm) and would oppose a proposed central bank digital currency. Right now, private-sector accounting firms KPMG and Ernst & Young audit the bank.

Ms. Rogers did not mention any politicians or political parties in her speech, hosted by the organization Women in Capital Markets, or in a question-and-answer session. However, she offered a pointed answer to a question about the risks of politicizing the bank.

“Public trust is fundamental to our ability to do our job, and anything that damages that trust ultimately damages our ability to deliver for Canadians. It ultimately hurts Canadians,” she said.

The bank is particularly concerned about keeping inflation expectations anchored. If people lose trust in the bank and start believing inflation will remain high, businesses will set higher prices and workers will demand higher wages, making rapid price growth a self-fulfilling prophecy.

The importance of central bank independence is “a pretty well-accepted fact in Canada, and by most politicians, and so it’s unusual for the bank to get dragged into the political rhetoric,” Ms. Rogers said. Still, she said, it is “entirely appropriate” for Canadians to ask tough questions, given how high inflation is and the bank’s inflation forecasting errors over the past two years.

“There were some things we got wrong,” she said, echoing a similar mea culpa from bank Governor Tiff Macklem last week.

Former Bank of Canada governor David Dodge told The Globe and Mail this week the central bank needs to get interest rates much higher, and fast, to prevent people from losing faith in its ability to get inflation back to its target of 2 per cent annual growth in the consumer price index.

“The issue for central banks is very much that they need to be careful not to let the expectations genie out of the bottle … which we didn’t do in the 1970s,” he said.

Central bank independence has been at the heart of Canada’s economic and financial system since the early 1990s, when the federal government gave the Bank of Canada a mandate to target low and stable inflation. The government renews this mandate every five years – most recently last December – which gives democratically elected leaders the opportunity to set the overarching goals for monetary policy. Ottawa then leaves the bank’s seven-person governing council alone to achieve these goals.

The system is rooted in the idea that maintaining the stability of the Canadian dollar sometimes requires politically unpopular choices, said Stephen Gordon, an economics professor at Laval University. When inflation is high, central banks intentionally slow the economy by raising interest rates.

“We had to think of some way of setting it up so that when the bank says something, people will believe it,” Prof. Gordon said in an interview. “If it’s going to be countermanded by politicians, it’s just not going to work. Because everyone knows that if a politician is given the choice of a recession just before an election, or something else, they’re not going to choose the recession.”

During the pandemic, the Bank of Canada worked in lock-step with the federal government to respond to the economic and financial crises caused by public-health restrictions.

Under a program known as quantitative easing (QE), the bank bought hundreds of billions worth of government bonds from investors, at the same time the government was issuing a record amount of bonds to fund its pandemic relief programs.

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Critics like Mr. Poilievre say this amounted to printing money to finance excessive public spending, undercutting central bank independence. Bank officials say the QE program was always guided by its inflation-targeting mandate; the idea behind buying government bonds – which act as a benchmark for mortgages and other types of debt – was to pull interest rates lower when the bank’s policy rate had already effectively hit zero.

Prof. Gordon said there will always be some co-ordination between the bank and the government, particularly in a crisis. But this doesn’t mean independence was compromised by the QE program.

“The issue would be if the bank had decided that they didn’t want to do quantitative easing, and were in some sense instructed to. I don’t think anybody really believes that,” he said.

The bank’s independence, and ability to make unpopular decisions, could be key to its campaign against inflation. It has raised its benchmark interest rate twice in the past two months – including an oversized hike in April – and bank officials have said they intend to keep pushing borrowing costs up.

Higher rates will squeeze heavily indebted households, particularly homeowners who stretched to get into the market, and low-income people who spend more of their earnings paying interest on debt.

Ms. Rogers said higher borrowing costs will hit some groups more than others, but argued that runaway inflation hurts everyone.

She said Canadians should trust the central bank to do what is necessary to bring inflation down, while acknowledging her team has to get prices under control to win back that trust.

“We know we have a ways to go before Canadians can fully judge the success of our actions,” she said.

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