Former Bank of Canada deputy governor John Murray is cautioning the central bank against “mission creep” as it moves into the final months of a major review of its monetary policy framework.
The bank should focus on maintaining or adjusting its core inflation targeting mandate, and avoid adding policy goals explicitly tied to unemployment, inequality or climate change, Mr. Murray said in a report for the C.D. Howe Institute published on Tuesday.
“By putting too much on the central bank, you risk eroding its independence, its effectiveness through monetary policy ... and taking responsibility away to a degree from those who really should be sharing it,” Mr. Murray said in an interview before the publication of his report, Mission Creep and Monetary Policy.
The Bank of Canada renews its mandate with the federal government every five years. This latest review, which is expected to wrap up in the fall, is happening as conversation grows among central bankers about the limits of monetary policy, and whether they can and should play a more active role in dealing with social and environmental issues.
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The U.S. Federal Reserve, for instance, changed its regime last year to allow inflation to run above 2 per cent after periods of low inflation, with the goal of bringing down unemployment. The European Central Bank is considering adjusting its bond-buying program to take climate change considerations into account, while the Reserve Bank of New Zealand was recently told by its government to explicitly take housing prices into consideration in policy decisions.
The Bank of Canada has given little indication it is moving in any of these directions. But it is undertaking its most ambitious review since the 1980s, weighing different monetary policy models, including a “dual mandate” that targets full employment alongside inflation, and an “average inflation” model, which would let inflation run above or below target to make up for recent misses.
Mr. Murray, a 34-year veteran of the Bank of Canada who was deputy governor from 2008 until his retirement in 2014, applauded the bank’s robust review, but cautioned against moving too far beyond the goal of price stability. He said the current flexible inflation targeting regime – which seeks to achieve 2-per-cent inflation within a 1-per-cent to 3-per-cent range – is relatively easy to understand and has done a good job since the 1990s at anchoring annual inflation around 2 per cent.
An average inflation targeting framework, similar to what was introduced by the U.S. Fed, does have appealing features, he said. But it could be hard to implement.
“There’s a lot, at least in theory, that could recommend it as something that would over time bring you much closer to your inflation target and as well bring you back to a state of full employment. ... The risk of course, is that tolerating an overshoot risks unanchoring inflation expectations,” he said.
A move toward a dual mandate could also prove tricky, he said.
“An explicit target for full employment requires that the central bank fix as a target something that it doesn’t have any influence over, at least the structural side of unemployment over the long run,” he said.
“Whereas inflation is something ultimately that ... is feasible for the central bank to deal with.”
Bank Governor Tiff Macklem has emphasized in recent speeches the importance of a broad-based labour market recovery as Canada ends pandemic measures. This has led some commentators to speculate that the bank is leaning toward introducing a dual mandate, although Mr. Macklem has played this down.
As for climate change, Mr. Macklem has signalled that little change is likely in the fall update. ”There is a clear role for the Bank of Canada in climate change within our existing mandate,” Mr. Macklem told The Globe and Mail in an interview in April.
Dealing with issues around climate change and inequality are important, Mr. Murray said. But other agencies and government organizations are likely better placed to address these problems.
“Some of these are politically difficult questions, like dealing with inequality by adjusting the tax system, which would be far more effective,” he said.
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