Hon. Diane Bellemare moved second reading of Bill S-275, An Act to amend the Bank of Canada Act (mandate, monetary policy governance and accountability).
She said: Honourable senators, I want to begin by acknowledging that the lands on which we are gathered are part of the unceded traditional territory of the Anishinaabe Algonquin people.
On August 31, the premiers of British Columbia, Ontario and Newfoundland and Labrador asked the Governor of the Bank of Canada to stop raising the key interest rate and consider the human impact of its monetary policy. Some commentators challenged those remarks and felt that the provinces were attempting to engage in political interference with the Governor of the Bank of Canada.
Personally, I saw those remarks more as an expression of the deep economic insecurity felt by the people in those provinces and echoed by the provincial premiers.
We all want to live in a country where our governments work to ensure our basic physical and economic security. Economic security alone can’t buy happiness, but family life is certainly happier and more optimistic when we can plan our income and expenses and pay the mortgage or rent without having to cut back on food or our children’s education. That has been my main motivator throughout my career: combatting economic insecurity and promoting ways of achieving it. That is what sparked my interest in the labour market, social dialogue and monetary policy.
Are you wondering what this anecdote has to do with my bill? It’s quite simple. A country’s prosperity depends in large part on the quality of its human and natural resources, and on its collective ability to develop them.
Monetary policy largely determines the basic cost of investment or development of our human and natural resources. Monetary policy therefore has a major role to play in promoting a country’s lasting prosperity, a basic condition for a nation’s economic security. Monetary policy is a serious and delicate issue, one that deserves particular attention, because a country’s standard of living largely depends on it.
For that reason, no one person, even surrounded by an excellent team, can be asked to take full responsibility for it and assume the consequences.
Colleagues, in the speech that follows, I’ll explain first in French and then in English the nature of my bill and the main principles behind it. I hope you’ll understand why it’s important to move it quickly through to committee.
I hope to see you take part in this second reading debate by asking me questions. My formal speech will be relatively brief.
What is the purpose of my bill, summed up in one sentence? It aims to strike a better balance between the Bank of Canada’s independence and the need for transparency and accountability.
To that end, it amends the Bank of Canada Act by adding a section on monetary policy, a mandate and objectives. This bill seeks to fill an existential void in the existing legislation, which is utterly silent on monetary policy and does not specify the objectives of such a policy.
This bill helps to bring the Bank of Canada’s legal framework into line with those of comparable central banks. The bank was established in 1935, and its preamble, which serves as its mandate, has not been rewritten since, even though the act was amended in 1985. This bill does not change the spirit of the objectives set out in the 1935 preamble. It simply expresses the bank’s mandate clearly and in contemporary language.
Bill S-275 also seeks to recognize the bank’s institutional independence while adding transparency and accountability requirements and safeguards. That relieves the governor of part of the decision-making burden. Believe it or not, the governor is currently the only person deciding the fate of millions of families, although he works with his governing council, of course. My bill will also strengthen public confidence in the bank’s decisions.
To that end, my bill creates a permanent committee on monetary policy. This committee will be chaired by the governor and will include deputy governors and experts not affiliated with the central bank. This good governance practice exists in several other countries, including New Zealand, England and, to an extent, the United States. Australia is also considering this approach.
This committee of experts from different backgrounds will provide assurances to the public that monetary policy is determined independently and is not subject to partisan political influences. The committee will also be responsible for supervising the cost-benefit analysis of the monetary policy and the assessment of its effectiveness. There is currently no regular analysis of the monetary policy’s effects. Unlike in other countries, the bank itself analyzes or assesses the monetary policy.
The committee will also take part in drafting the five-year agreement between the bank and the government to set the monetary policy framework. This committee could also propose alternative strategies as buffers against such supply-side shocks as unpredictable spikes in oil prices or adverse weather conditions leading to crop failures.
This expert committee will reassure Canadians that the bank is fulfilling its role of promoting economic prosperity. It goes without saying that the composition of the external members of the permanent committee is of the utmost importance. That is why Bill S-275 sets out specific eligibility conditions and skill requirements. The appointment process will also have to be open and transparent, and the members will have to be selected after consultations with key players in the economy, including representatives from major employer and labour organizations. It is essential that these experts, who do not necessarily work within these organizations but are recognized by them, come from diverse backgrounds. We don’t want experts who all went to the same school and don’t have field experience.
As you know, Canadians and the financial markets are often nervous on the day the Governor of the Bank of Canada announces the key interest rate. It is not surprising given the financial consequences for people’s wallets and the impact of this decision on the economy. Besides, most Canadians don’t really know how this decision is made.
Technically, the Governor of the Bank of Canada determines the key interest rate eight times a year in the context of its monetary policy. He is supported by his Governing Council, made up of deputy governors whom he has chosen and who work for the bank. In recent months, an external, non-executive deputy governor has joined the committee.
The governor and his team could get it wrong, and the Bank Act is of no assistance or protection.
The Bank of Canada Act was adopted in 1935. The act was amended through time and revised in 1985, but the objectives of the bank and the mandate of monetary policy were never specified in the act. It is completely absent.
The preamble to the Bank Act presents a list of objectives of equal importance. The bank, on its website, summarizes this preamble as the bank has the mandate, “. . . to promote the economic and financial welfare of Canada.” To this effect, section 8 of the act gives the governor full powers to act as he sees fit, without any transparency requirements.
However, since 1991 — more than 30 years — the monetary policy framework is specified in a five-year agreement prepared by the bank and agreed to with the government through the Minister of Finance. This framework determines the target in terms of inflation rate without specifying the timeframe for achieving it. For the last 30 years, and renewed in December 2021, this agreement has targeted a 2% year-on-year increase in the overall Consumer Price Index.
This agreement is tabled in Parliament, but is not subject to any parliamentary approval or accountability. This document — which has no legal force, because it’s not in the law — allows the governor to raise the base interest rate if and when the overall CPI increases by more than 2%. This is a simple rule for a problem that is not, and it is a rule that has been created through time and never had any foundation in the Bank of Canada Act.
Honourable senators, as you know, inflation in the 21st century has become a more complex issue than in the previous one. It is not always an excess demand problem. Climate crisis, political uncertainty, reversed globalization, demographic issues, all may create supply shocks that will impact inflation. Rising interest rates reduce aggregate demand with certainty. But Canadians don’t have the same assurance that rising interest rates will cope with inflation because as you know, increased interest rates can have boomerang effects. When the Bank of Canada raises its basic rate, increases to mortgage rates follow.
According to Statistics Canada — and that’s a really important statistic — mortgage cost increases are responsible for more than 30% of the yearly cost of living increases. It’s 37% with rental living increases. It can also have detrimental effects on specific sectors such as housing, for example. When housing spaces are in short supply and construction starts decrease because of less affordable mortgage conditions, rental rates go up. The two together are around 37% of the increase in the CPI that can be attributed to the monetary policy.
It is hard to predict the consequences of monetary policy on the economy because it reacts with lags. The bank can easily be too severe or too loose, and it is easy to overshoot monetary policy and precipitate a recession.
Therefore, some countries have incorporated safeguards into their legislation. For example, in the U.S., Australia and New Zealand, monetary policy pursues a dual mandate, that is, price stability and maximum employment or full employment. Consequently, this dual mandate forces central banks to be prudent in the conduct of monetary policy.
Some countries have also put in place monetary policy committees where external members can help assess the risks involved and work on diverse scenarios.
If supply chain shocks are to become common, shouldn’t monetary policy consider the expertise of experts knowledgeable about those realities?
This bill adds safeguards in the conduct of monetary policy by specifying the dual mandate of monetary policy and by creating a monetary policy committee called the permanent committee. The composition of this committee and the process of selection of its members are of the utmost importance. The process needs to be open and transparent. These experts should be appointed after consultation, as I said previously, with organizations representing civil society and the economy, such as important business associations and labour organizations, so that the committee is best equipped to balance the goals of price stability and full employment. This committee would be credible to call for responsible behaviours from all economic actors.
The committee would participate in the discussion about setting the policy rate. When I say “the committee,” I mean the big committee chaired by the governor, with the deputy governor and the external experts. They would participate and vote on setting the policy rate, as they do elsewhere. The members would adopt the annual cost-benefit analysis framework that supports policy; supervise the assessment of the effectiveness of monetary policy — because we can, as I said, question the link between increasing interest rates and taming inflation — ensure that the use of non-traditional tools is consistent with the bank’s mandate; and participate in the drafting of the five-year agreement with Canada.
Last but not least, I have to say that some parts of this bill have been inspired by the work done by a special committee appointed by the government of Australia to review the Reserve Bank of Australia Act. This report is entitled An RBA fit for the future. It was published in March 2023.
When I read this report, I said that’s a gift from I don’t know whom that gave me the legitimacy to pursue what I wanted to do, which is to introduce an amendment to the Bank of Canada Act so that it is modernized. But do you know who was on the committee that wrote this? Three experts worked together on the report, and it benefited from the experience of a former deputy governor of the Bank of Canada. Guess who? It was Carolyn Wilkins. It’s very interesting, so I was inspired by the recommendation of this report to draft this bill.
The time has come, colleagues, to demand greater transparency on the real impact of short- and medium-term monetary policy on the Canadian economy and to give the governor and his team the tools to achieve its main objective, because the main objective of the Bank of Canada is prosperity. It is not price stability at all costs.
When I realized that, I said this is how I have to talk about that. The governor and his team have powers to do anything they want to promote prosperity. Nowhere in the Bank of Canada Act is it underlined that price stability is to be the sole objective. It cannot be the sole objective. Because of that, I think it is very important to think about that and to put in place the institutional change in the act to balance the independence of the bank and the accountability principle. By having this external committee, which would have the right to speak outside of the bank, it creates confidence in the population that the bank is doing the right thing.
I’m finished with my speech. I can take questions, if you want. I would be pleased to answer them. Thank you very much.