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The election campaign, assuming it is imminent, will take place in the shadow of an enormously important decision about government policy: the Bank of Canada’s mandate, whose five-year term is up for renewal this fall.

Probably nothing that will be discussed during the campaign will have more potential to affect Canadian lives, for good or ill. The Bank’s lax approach to inflation in the early 1970s set off a 20-year firestorm of rising prices, rising interest rates and rising government debt that was only finally extinguished at the cost of two painful recessions.

By contrast, the long period of relative price stability since the current inflation-targeting regime was implemented has provided the foundation for steady growth ever since, only briefly interrupted by the global financial crisis of the late 2000s.

The pandemic, of course, has changed everything. Massive government deficits, largely financed by the Bank, hold the potential for sharply higher inflation, if not unwound just as sharply. At the same time, some argue that, in a world of near-zero interest rates, a little more inflation might be a good thing, allowing the Bank to engineer deeper cuts in real (i.e. net of inflation) interest rates than would otherwise be the case.

So it’s critically important to get this decision right: the risks are high on either side. And yet we are unlikely to hear a word about it during the campaign.

In part, this is a reflection of the unusual autonomy the Bank enjoys, even as an arm of the government. The Minister of Finance does not simply tell the Governor of the Bank what course to pursue. Rather, the two agree on a policy, which remains in force for the next five years.

How precisely these agreements are negotiated we can only guess at, but the procedure respects the principle that elected governments are ultimately responsible for monetary policy, while leaving the Bank to get on with the day-to-day implementation of it, free of political interference.

So long as the late-20th-century political consensus around the broad objectives of monetary policy endured, there was probably little point in debating it, least of all at election time. But with the recent breakdown of that consensus, it is surely at least worth mentioning. What policy would each of the parties recommend to the Bank, were they to form the government?

The range of respectable options was suggested by a conference organized last fall by the Max Bell School of Public Policy at Montreal’s McGill University. Most are rooted in the idea that the Bank should aim to hit some sort of target for inflation – a commonplace notion now, but once considered somewhat revolutionary.

They differ in what sort of target, or targets, to pick. In addition to the status quo – a target of 2-per-cent annual increases in the consumer price index, plus or minus one percentage point – five alternatives were discussed: a higher inflation target, say 3 or 4 per cent; a “dual mandate,” in which the Bank is obliged to target not just inflation but also output or employment; a target using nominal GDP, which combines movements in prices and output in one measure; an inflation target, but with asset prices included; and finally, a lower inflation target, somewhere between zero and 2 per cent.

Arcane as these distinctions may seem, they imply radically different policies and outcomes. Still, it’s not clear the alternatives offer any improvement over the status quo.

To adopt a policy of higher inflation, for example, with all of its well-known costs and risks, you have to attach great importance to the “zero lower bound” on interest rates as a policy constraint – at a time when negative rates have become common.

Dual mandates, meanwhile, assume not only that there is a trade-off between inflation and employment, but that it is an exploitable one; in an effort to target both, the Bank might not hit either. Ditto, targeting asset prices: to tighten rates, in an effort to pop asset-price bubbles, is to ignore the consequences for inflation – or employment. The better remedy for upset financial markets is regulation.

There is, however, a case for setting a modestly lower inflation target, making 2 per cent the ceiling rather than the mid-point. Not only was this the target that was originally envisaged – the 1991 agreement speaks of aiming for “price stability,” defined as inflation that was “clearly below 2 per cent” – it is also the policy the Bank has actually if inadvertently pursued, having consistently undershot its notional target.

Sometimes it’s best to make a virtue of necessity. If you can’t fit the policy to the target, you can at least fit the target to the policy.