Liberal Leader Justin Trudeau said he did not know if he would change the Bank of Canada's mandate if re-elected, adding that he does not think of monetary policy as a top economic priority if his party forms the next government.Sean Kilpatrick/The Canadian Press
With the rate of inflation hitting decade-highs in the months leading up to the federal election, monetary policy has become a campaign issue, upending norms that politicians avoid commenting on central banking.
It began Wednesday, when Liberal Leader Justin Trudeau was asked whether he would change the Bank of Canada’s mandate if re-elected. Mr. Trudeau said he did not know, adding that he does not think of monetary policy as a top economic priority if his party forms the next government. The comment quickly drew online jeers from political opponents.
Conservative Leader Erin O’Toole said at a Thursday news conference that he favours sticking with the Bank of Canada’s existing 2-per-cent inflation target. People’s Party Leader Maxime Bernier put out a statement Thursday saying the central bank should aim for zero inflation – a target well below what academic economists and central bankers consider either feasible or desirable.
Politicians typically avoid commenting on monetary policy, leaving it up to the central bank to set interest rates independent of political interference with an aim of achieving low, stable and predictable inflation.
Why inflation should be a key election issue
Every five years, however, the bank renegotiates its mandate with the federal government. The current review is set to wrap up in the coming months, giving whatever party forms government after the Sept. 20 election a rare opportunity to weigh in on the overall direction of monetary policy.
“We’ve never had this perfect storm where there was a mandate review right before an election, at a time when inflation is somewhat higher than the target,” said Mike Moffatt, an assistant professor of business, economics and public policy at the University of Western Ontario’s Ivey Business School.
On Wednesday, Statistics Canada reported that the annual inflation rate was 3.7 per cent in July, the highest level since 2011, driven by a combination of rising housing costs, supply chain bottlenecks and year-over-year comparisons to low prices early in the pandemic. The central bank expects inflation to remain above 3 per cent for the rest of the year, before returning close to 2 per cent next year.
“Politicians should be respecting central bank independence,” Dr. Moffatt said. “But how you do that is not by ignoring the mandate, it’s by not playing armchair quarterback every time they raise or lower interest rates. As long as they’re sticking to the conversation about what the next mandate should be ... I think that’s actually very healthy in a democratic society.”
Since the Bank of Canada adopted inflation targeting in the 1990s, its mandate reviews have largely been a technical affair. Bank researchers scour the latest macroeconomic trends and academic thinking, then present a recommendation to the Department of Finance for approval. Past reviews have considered options such as raising or lowering the inflation target or targeting price levels instead of an inflation rate.
Every review since the process was formalized in 2001 has resulted in maintaining the 2-per-cent inflation target within a 1-per-cent to 3-per-cent target range – with a few minor tweaks here and there.
“I think Finance – with many other problems to worry about – their response has been, ‘Well, the current system isn’t broken. So why would we try to change it?’ And then they bring out their rubber stamp,” said Chris Ragan, economics professor and director of the Max Bell School of Public Policy at McGill University.
“What’s changed is that there is more discussion today, not just in Canada, but elsewhere, about the alternatives,” he said.
The current mandate review, which started in 2017 under the direction of former bank governor Stephen Poloz and former senior deputy governor Carolyn Wilkins, has been particularly ambitious. For the first time since the 1980s, the bank is running a “horse race” looking at six models to see which does the best job maintaining price stability and fostering economic growth amid a variety of shocks.
The leading alternatives to the existing flexible inflation-targeting regime are a “dual mandate,” where central bankers target employment alongside inflation, and “average inflation targeting,” where central bankers explicitly aim for above-target inflation after periods of slow consumer price growth. The U.S. Federal Reserve adopted a form of average inflation targeting last summer, while maintaining the dual mandate that it has had since the 1970s.
The Bank of Canada review comes at a crucial moment for central bankers around the world. Ultralow interest rates have made traditional monetary policy tools less effective, leading central bankers to rely more and more on unconventional tools such as government bond buying, known as quantitative easing. This has raised new questions about central bank independence on top of old questions about balancing monetary stimulus against financial stability concerns.
Central bankers are also dealing with emerging issues tied to climate change and digital currencies.
“We live in that world .... There’s going to be more questions on the hustings about all that kind of stuff, and I think that’s fine,” Dr. Ragan said.
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