Karamveer Lalh is a lawyer with James H. Brown & Associates LLP in Edmonton. He has worked for the United Conservative Party of Alberta and the Conservative Party of Canada.
Over the past year, we have seen two different versions of Prime Minister Justin Trudeau when faced with questions around central-bank independence.
About a year ago, in the context of the federal Conservative leadership race, Mr. Trudeau was quick to imply that then-candidate Pierre Poilievre’s commitment to fire Governor Tiff Macklem of the Bank of Canada for failing to keep inflation in check was irresponsible and undermined the institution’s independence.
Yet the Prime Minister criticized the Bank of Canada’s decision in July to raise interest rates to 5 per cent: “This is not the news that any Canadian wanted to receive,” he said, implying that the move would hurt people struggling with the cost of living.
This about-face reflects growing sentiments on the political left, matching the long-standing criticism from the right – but there’s a critical difference. While the right’s critique focuses on the bank’s ability to perform its mandate to keep the inflation rate between 1 per cent and 3 per cent, the left challenges the mandate itself.
The left’s position thus presents a more profound threat to the independence and function of the Bank of Canada, a cornerstone of our modern financial system.
B.C.’s NDP Premier, David Eby, has gone even further than Mr. Trudeau in criticizing the bank’s rate hikes.
“We have not seen the full impact yet. People have not renewed their mortgages yet, and the businesses that are struggling under debt have not started going under yet, but they will,” Mr. Eby said in July. “Frankly, I don’t believe in solutions that come at the expense of the poorest people.”
Unlike the right, the left’s criticism of the bank represents not simply a matter of competence but of principle – not whether the institution is good enough at what it does, but whether it should even be doing what it does.
It is regrettable that the Bank of Canada has become a popular subject for such partisan criticism. Established as a non-partisan institution, the bank has a clear mandate to control inflation – one in which it has largely been successful.
The division between fiscal policy, which is the realm of elected officials, and monetary policy, the domain of the central bank, is a widely recognized consensus around the world. Fiscal policy concerns public expenditure, taxation and public debt, while monetary policy involves controlling the money supply and interest rates. This separation is crucial for several reasons.
First, monetary policy is a highly technical field that requires expertise often beyond the grasp of generalist politicians. The effects of decisions made in this domain have a delayed impact on the economy, conflicting with the short-term focus of politicians who are often primarily concerned with their re-election.
Second, monetary-policy decisions can be unpopular but necessary. Raising interest rates can slow down inflation but may lead to job losses in the short term. Central-bank independence ensures these decisions can be made in the best interest of the economy, rather than in response to short-term political pressures.
Finally, an independent central bank provides a check against fiscal irresponsibility. If a government borrows excessively, it can lead to inflation, and the bank can counteract this by raising interest rates. This serves as a deterrent for the government to overspend and accumulate too much debt, ensuring fiscal prudence.
We should learn from history. Both the high inflation in the late 20th century and the Great Depression were catalyzed by political meddling in central banking. We are still far from such a situation, but every partisan jab at the bank moves us closer.
Central-bank independence must be preserved as a pillar of our economic system that maintains its stability. While there’s always room for scrutinizing the bank’s actions and holding it accountable to its mandate, we should not forget the lessons of the past. The price of forgetting could be another economic crisis, where the most vulnerable among us will suffer most – more so than anyone would under the current higher interest rates.
Instead of undermining the Bank of Canada’s independence, let’s focus on supporting it in its essential role, and work together to formulate and implement responsible fiscal policies.