A public rift among the Bank of Canada’s policy-setting leadership is, frankly, unheard of. So when one emerges – as it did in the latest document released by the central bank – it’s hard to know just what to make of it.
The bank’s Summary of Deliberations – a seven-page digest of the discussions of the policy-setting Governing Council leading up to its Oct. 25 interest-rate decision – revealed Wednesday that the council was divided on whether further interest-rate increases might still be necessary.
“Some members,” we were told, think it’s “more likely than not” that the council will need to nudge the bank’s policy rate still higher to tame inflation. “Others” believe it’s “most likely” that the current rate of 5 per cent is as high as the bank will need to go.
At the end of the discussions, the council – made up of Governor Tiff Macklem and his five deputy governors – all agreed to hold the rate steady and kick the disagreement down the road to future rate-setting meetings.
We’ve never seen anything quite like this before: The bank’s decision makers admitting that they’re split on a key element of rate policy.
That’s partly because we’ve only seen a handful of these summaries – ever. This published glimpse behind the Bank of Canada’s curtain is still so new that what is and isn’t “normal” is still evolving.
The bank only began producing the summary of deliberations in February. Prior to that, the Governing Council always spoke publicly as a single voice: Both the rate decision and the rationales behind it were expressed, in documents and speeches, as the shared consensus of the group. If there was any dissension, it was settled before the group emerged from behind very firmly closed doors.
In the first few summaries that the bank published, that hadn’t changed much. The documents repeated and expanded on talking points that the bank had already made public in the rate announcement itself, or in its quarterly monetary policy reports, or in speeches from Mr. Macklem and his deputies after rate decisions. The summaries focused on the consensus among council members, while only very occasionally hinting at points of contention.
But as the bank has grown more comfortable with this new disclosure vehicle, it has become more candid about its internal debates. Still, this is the first time it has actually spelled out such a fundamental, unresolved disagreement. It’s hard to know if this is another step in the openness of these summaries, or if this is a unique moment of dissent in the ranks. Maybe it’s both.
The document doesn’t reveal specifically where each of the council members landed on the question, so we can’t say who is in which camp among the bank’s leadership. But one thing we do know is that the makeup of the Governing Council has changed significantly over the past several months.
This was only the second rate decision for Rhys Mendes, a long-time Bank of Canada economic analyst who became a deputy governor in mid-July. Nicolas Vincent, who joined the council in March, is the bank’s first-ever “non-executive” deputy governor – a position created specifically to bring an independent, outsider’s voice to the bank’s interest-rate deliberations.
With one-third of the council settling in and bringing fresh perspectives to the table – including one member whose position is deliberately designed to introduce a different viewpoint – perhaps it’s no surprise that the past unanimity has been broken.
That’s absolutely healthy. Many central banks, including Canada’s, were guilty of an overabundance of group-think emerging from the COVID-19 recession, and that may have contributed to slow recognition of the rising inflation threat. Having some naysayers in the room might help avert further mistakes as we continue to try to get out from under those mistakes.
We don’t know for sure which of the Governing Council’s two camps Mr. Macklem himself is in. But his public comments after the Oct. 25 rate announcement suggest that he’s among the members who are hopeful that we’re done with rate hikes.
“The economy’s not overheated any more. So, we do think there’s more inflation relief in the pipeline,” he told CBC Radio on Oct. 26. “If that comes through, we won’t have to raise rates further.”
If Mr. Macklem is going to sway the more pessimistic among his colleagues, he’ll need the economic data to do the convincing for him. Since the Oct. 25 rate decision, the major economic data have largely supported the no-more-hikes case: Gross domestic product figures were weaker than expected, unemployment rose, wage growth slowed.
But for the doubters, the proof will have to come from the inflation data themselves – and, specifically, the measures of core inflation, which continue to signal that underlying price pressures are still lingering.
The date to circle is Nov. 21. That’s when the October Consumer Price Index report comes out, providing the last detailed look at inflation before the Dec. 6 rate decision. As the summary of deliberations spells out, the members “need to see downward momentum in core inflation to be confident that monetary policy was sufficiently restrictive to restore price stability.”
If and when we see that, we can expect to see the bank speaking in a more unified, and relieved, voice.