From left and right, political backlash to Bank of Canada grows

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The New Democratic Party is criticizing the Bank of Canada’s rapid interest rate increases, further complicating the political environment for the central bank as it attempts to get inflation under control.

NDP leader Jagmeet Singh sent a letter to Prime Minister Justin Trudeau on Friday arguing that the bank is causing unnecessary harm to workers by pushing interest rates higher. He doubled down on this criticism in an appearance on CTV on Sunday, saying that “there’s absolutely no merit” to the bank’s approach to fighting inflation.

With inflation surging to multidecade highs, monetary policy has become a major topic of political debate for the first time in a generation. Conservative Party Leader Pierre Poilievre has been a fierce critic of the central bank, and built much of his leadership campaign earlier this year around the topic of inflation. Now, with the central bank’s rate hikes pushing the economy toward recession, labour leaders and left-leaning politicians, such as Mr. Singh, are also calling on the bank to change its path.

This complicates things for the central bank, which is already struggling to shore up its credibility in the face of high inflation. And it raises questions about the future of the principle of central bank independence from political interference.

The bank is engaged in one of the fastest rate-hike cycles on record. It is raising borrowing costs for Canadian households and businesses, intentionally slowing down the economy in a bid to get control of prices and stabilize the purchasing power of the dollar.

Bank governor Tiff Macklem is widely expected to announce another large rate hike on Wednesday, which would be the bank’s sixth consecutive move since March.

Until recently, most critiques of the central bank have come from the Conservatives, who argue the bank’s government-bond-buying program during the pandemic was a key driver of inflation. Mr. Poilievre has championed this position, calling the bank an “ATM machine” for the government and saying he would sack Mr. Macklem if the Conservatives form government.

The critique from the left has emerged more recently. Mr. Singh and others say the bank is misdiagnosing the causes of inflation – downplaying corporate greed and overemphasizing wage growth – while driving the economy toward an unnecessary recession. They argue the bank should wait to see how its five previous rate hikes are impacting the economy before announcing more.

“We absolutely need to combat inflation,” Mr. Singh said on CTV. “But if the Bank of Canada’s approach has nothing to do with the root causes of inflation, and is only going to cause pain for Canadians, then we’ve got to question why that is the approach they’re taking, when there’s no evidence for that approach.”

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This is not a mainstream view. Most academic and private-sector economists argue that further interest rate hikes will help bring down inflation – although higher rates will certainly mean slower economic growth and higher unemployment. The question for central bankers is less about the efficacy of rate hikes, than about how much economic pain is acceptable in pursuit of the bank’s mandate to keep prices stable.

Mr. Macklem has said repeatedly in recent months that the Canadian economy is overheating, with demand for goods and services outstripping supply, and that the labour market will need to weaken before inflation can be brought back to the bank’s 2-per-cent target. In September, annual consumer price inflation was 6.9 per cent.

So far, the federal government has avoided commenting publicly on central bank policy. This is in line with the principle of central bank independence. The government sets high-level priorities for monetary policy every five years, but stays out of day-to-day decision-making about interest rates.

Nonetheless, the high-profile criticism from opposition politicians is making the central bank’s job more challenging, according to Rob Gillezeau, assistant professor of economic analysis and policy at the University of Toronto.

“It’s reasonable for folks in the policy space to debate central bank policy, but I have a lot of concerns with elected officials and political decision makers suggesting a particular path to the bank a couple days before the overnight interest rate decision,” Prof. Gillezeau said.

“A number of folks think – and this is not constrained to Canada – that, because of politics, central banks might lose their nerves on containing inflation.”

Politicians do have a significant role to play in controlling inflation, with decisions about spending and taxation influencing overall demand in the economy. Former Bank of Canada governor Mark Carney told a Senate committee meeting last week that fiscal discipline will be “imperative” in a new era of higher interest rates, slower growth and more persistent inflation.

“Sound money and credible fiscal policy will be rewarded. But mistakes will be punished and no one’s really going to be exempt,” he said.

The challenge for governments right now is crafting policy to support segments of the population struggling the most with the rising cost of living, without spending too much and fuelling overall inflation. So far, the federal government has taken a relatively minimal approach to using fiscal policy to address affordability issues.

Last month, the government announced a $4.6-billion package that included new payments to uninsured parents to cover their young children’s dental costs, a doubling of the GST credit and a boost in rent supports. Finance Minister Chrystia Freeland explained the government’s approach in a speech last week.

“We cannot compensate every single Canadian for all of inflation driven by a global pandemic and by Putin’s invasion of Ukraine. To do so would only make inflation worse, and force the Bank of Canada to raise interest rates even higher,” she said.