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What central bank independence does and doesn't mean

These are stories Report on Business is following Monday, May 6, 2013.

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On central bank independence
Louis Rasminsky probably best summed up how central bank independence should work in a democracy.

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"In a democratic country you couldn't have a situation, as I see it, where a part of government was not answerable to anyone except their own conscience," the third governor of the Bank of Canada once told me.

"On the other hand, it would be dangerous to have a system where monetary policy was a departmental concern and every shot would be called by the minister of finance or the deputy minister of finance representing the minister."

Mr. Rasminsky was referring to how the system should work when the central bank governor and the finance minister disagree, but the same concept applies to the issue playing out today: Finance Minister Jim Flaherty's surprise choice for the next governor.

To recap, Mr. Flaherty stunned Bay Street last week by choosing an outside candidate, Export Development Canada chief Stephen Poloz, to succeed Mark Carney as governor when the latter heads to the Bank of England this summer.

In doing so, Mr. Flaherty skipped over Tiff Macklem, the current senior deputy governor, who most believed would get the job.

As The Globe and Mail's Kevin Carmichael and Tavia Grant report, this has raised troubling questions among some as to whether the government is influencing monetary policy, which it's not supposed to do.

We don't know whether Mr. Flaherty ignored the recommendation of the selection committee of the central bank's board and went for his own choice because we don't know who the committee recommended.

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What we do know is that Mr. Macklem was the obvious candidate on Bay Street, and that Mr. Poloz certainly has the credentials, though he's been away from the central bank for quite some time.

Mr. Poloz could be seen as favouring the Harper government's forceful trade push, given his expertise, but economists widely reject the suggestion that he could use his position to drive down the Canadian dollar to give ailing exporters a boost.

(True, he could talk about the loonie more, but he's not going to actually manipulate its value in the market. The Bank of Canada doesn't take that approach and the government has pledged not to do it.)

While central bank independence is sacrosanct, it doesn't mean the government doesn't get its say on who's at the helm.

Remember that Mr. Carney was a surprise choice for the job, and he went on to become the world's best central banker.

Or go back further to the case of John Crow, who wasn't reappointed in the mid-1990s after the Liberals decimated the Conservatives in the 1993 election in the wake of a devastating recession.

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Mr. Crow had been driving publicly for zero inflation, and during his term unemployment spiked to about 12 per cent.

He could not reach an agreement with the new finance minister, Paul Martin, and, as a result, his senior deputy, Gordon Thiessen was chosen as his successor.

This was the government having its say, though it opted for an insider.

The system designed by Mr. Rasminsky – under which the finance minister must issue a directive to the governor in the case of a disagreement, and if it wants a shift in policy – is a good one in a democracy.

It ensures the government doesn't tinker for political purposes, while it's protected from a governor going rogue.

Central bank independence is indeed sacrosanct, but the suggestion that the government doesn't get a say in who is governor, or any lack of accountability, for that matter, has never been in question.

Markets mixed
Markets are mixed so far this morning, after Friday's run-up by U.S. stocks to record levels.

Tokyo's Nikkei and London's FTSE are closed today, but Hong Kong's Hang Seng climbed 1 per cent, while Germany's DAX was flat by about 9 a.m. ET and the Paris CAC 40 was down by 0.2 per cent.

Dow Jones industrial average and S&P 500 futures were flat.

Both U.S. benchmarks closed Friday at record highs, the S&P topping the 1,600 mark and the Dow breaching 15,000, though it closed just below that mark.

While U.S. stocks sit at record levels, Toronto's S&P/TSX composite index still lags.

"In a sudden twist, while the market spent much of the week digesting soft spring data, the Canadian economy came roaring back to life," said senior economist Robert Kavcic of BMO Nesbitt Burns, referring to a Statistics Canada report earlier in the week that showed gross domestic product expanding by a better-than-expected 0.3 per cent in February, while January's reading was revised up.

"Real GDP topped expectations in February, prompting an upgrade to our Q1 growth forecast (to 2.3 per cent from 1.5 per cent), which was then confirmed by a solid March trade report," he added in a report Friday.

"That said, we still expect the Canadian economy to trail its U.S. counterpart through 2013, and the equity market appears to share that view. While U.S. indices were punching new highs this week, the TSX still sits about 20 per cent shy of its 2008 peak."

Onex in trade show deal
Onex Corp. is taking over a U.S. trade show operator in a $950-million (U.S.) cash deal, The Globe and Mail's Bertrand Marotte reports.

Toronto-based private equity firm Onex said today it has agreed to acquire Nielsen Expositions from its parent, an affiliate of Neilsen Holdings NV.

Nielsen Expositions is a major operator of business-to-business tradeshows in the United States in nine different markets, including general merchandise, sports, hospitality and retail design, jewelry and photography.

"Nielsen Expositions' strength in the U.S. business-to-business tradeshow industry is evidenced by its high renewal rates, long-standing exhibitor relationships, and the brand strength of the underlying shows," Onex managing director Kosty Gilis said in a statement.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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