At a news conference last week, a reporter asked Chrystia Freeland if she had any views on a pressing issue that she must deal with before the end of the year: the five-year renewal of the Bank of Canada’s inflation-targeting mandate.
Even before the question was finished, a smile crept across the Finance Minister’s face.
“I have many views on that issue,” she said (before quickly declining to reveal any of them).
Why Ms. Freeland was so amused by the question, and so cryptically enthusiastic in her answer, was unclear. Perhaps it was the opportunity to dispel the impression that her boss, Prime Minister Justin Trudeau, doesn’t worry about such matters.
“When I think about the biggest, most important economic policy that this government, if re-elected, would move forward, you’ll forgive me if I don’t think about monetary policy,” Mr. Trudeau said during the recent election campaign – a declaration that has been paraphrased mockingly by his political opponents since. It appears his Finance Minister wants to be clear that the government is a great deal more focused on the case than Mr. Trudeau’s comments might have suggested.
Or maybe Ms. Freeland was hinting that the government’s renewal of the Bank of Canada’s five-year mandate – the underlying principles that the bank applies when deciding on interest rates – will be a lot more this time around than the usual rubber-stamping of another five years of the bank’s long-standing 2-per-cent inflation target. Perhaps Ms. Freeland is prepared to step into the debate about the central bank’s monetary policy-setting framework in a way that no Canadian government has in decades.
If so, it will be a tightrope walk. She’ll want to strike a delicate balance of exerting the government’s influence without undermining the central bank’s independence.
It certainly would be reasonable for the government to exercise at least some of its power in this process, even if previous governments have opted to keep more of a distance.
We are, after all, at a pivotal economic moment, one in which fiscal and monetary policy have played and continue to play major roles. And in the framework built around the Bank of Canada to secure its independence from the political realm, this is really only one of two windows afforded to the government to influence the direction of monetary policy (the other is when appointing a new governor). If it doesn’t involve itself in the hard questions surrounding the bank’s mandate now, we’re five years away from the next opportunity.
What’s more, the bank itself has opened up this mandate renewal process to more rigorous scrutiny and external input than usual. It has undergone a very public, multiyear review process of its inflation target, and laid out for debate a range of options for potential revisions. In doing so, it has practically invited the government to take a more active role in the final decision than it often has in the past.
Still, there’s a danger the government may wade too deeply into this fray for the wrong reasons – most of them political.
With the Ottawa rhetoric around inflation approaching a fever pitch, and Mr. Trudeau routinely accused of ducking the role of policy in either creating or failing to address the problem, there may be a temptation to impose something on the central bank to prove that his government isn’t asleep at the inflation-fighting switch.
The government might also be tempted to more closely align the central bank’s policy-setting objectives with its own – for instance, to broaden the mandate to include full, inclusive employment, or climate objectives, in addition to the inflation priority.
On the other hand, Mr. Trudeau and his colleagues are under pressure from the Conservative opposition to take a firm stand on inflation fighting, by putting its foot down and ordering the bank to stick to its single-pronged mandate of the 2-per-cent inflation target. The government may want to do just that, to show its critics that it isn’t soft on inflation.
The most likely options on the table at this late stage are to either leave the mandate alone (perhaps with some minor tweaks around the language of how the bank interprets the 2-per-cent target), or a switch to a dual mandate that adds a full-employment objective to the mix. The bank itself has long maintained that the bar is set high to justify any change, but it has lately sounded increasingly open to adding an employment component. It’s difficult to say which way the bank is leaning.
As Ms. Freeland herself noted, the Bank of Canada has poured a lot of time and resources into assessing the options. If the government were to big-foot the decision now, it would invalidate a multiyear public process, and raise red flags about how independent the central bank is from this government.
This is why the minister must tread carefully. She has an important and legitimate role in the final decision. But compromising central bank independence would do more harm than any political ends would justify.
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