Bank of Canada is not transparent or accountable enough on monetary policy

By: The Hon. Diane Bellemare

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Canadians and the financial markets are often nervous on the day the Governor of the Bank of Canada announces the key interest rate. Not surprising, given the financial consequences for people’s wallets and the impact of this decision on the economy.

But do we really know how this decision is made? The governor and his team could get it wrong, and the Bank of Canada Act, which governs the central bank, is of no assistance in providing any accountability. This highlights the need to update the law to reflect contemporary economic realities.

The preamble to the Bank of Canada Act was never changed since it was adopted in 1935. It presents a list of objectives, of equal importance, with the intent “to promote the economic and financial welfare of Canada.”

But the specific mandates for the bank and for monetary policy have never been incorporated in the act. It therefore gives the governor full powers to act as he sees fit, without any transparency or accountability requirements.

The same lack of parameters of the Bank of Canada Act exists in the institution’s guidelines for targeting inflation. Since 1991, there has been a monetary-policy framework specified through a five-year agreement prepared by the bank in agreement with the federal government through the Minister of Finance.

This framework determines an inflation-rate target without specifying the time frame for achieving it. For the last 30 years, and renewed in December, 2021, the agreement has targeted a 2-per-cent year-on-year increase in the overall consumer price index (CPI), with a control range of 1 to 3 per cent around this target.

This agreement is tabled in Parliament but is not subject to any parliamentary approval or accountability. The framework, which has no legal force, allows the governor to raise the base interest rate as long as the overall CPI increases by more than 2 per cent. This is a simple rule for a problem that is not at all simple.

Indeed, inflation in the 21st century has become a more complex issue than in previous generations. It is not mainly an excess demand problem. The climate crisis, political uncertainty, reversed globalization and demographic issues all create supply shocks that will have an impact on inflation. So the target of 2 per cent may no longer be realistic.

Rising interest rates reduce consumption, investment, growth and employment. But it is not clear that it will reduce prices without creating a recession.

While many have come to see inflation targeting as a central bank’s primary job, that does not have to be the case. The Bank of Canada should not put aside its broader purpose – the prosperity of Canadians, enshrined in legislation all those years ago – in the name of a strategy that comes with substantial risks.

The Bank of Canada Act gives the governor and the bank a great deal of autonomy – as it should, given the politically independent nature of the institution – but the bank is not above Parliament. It must explain how its policy reduces inflation – and at what cost.

Currently, the governor explains his view in parliamentary committees and to the media. And recently, the bank started publishing the summary of the deliberations on the interest-rate decision. Four times a year, it publishes a review of the general economic context. This is where the Bank of Canada’s transparency ends.

We do not know the economic and financial costs of the bank’s strategy for individuals, businesses and governments. What are the redistributive effects, and the effects on investment and productivity? What are the specific indicators on which decisions are based? What are the alternatives?

It is true that we do not demand such detailed explanations for every single policy matter. But in the current economy, there is arguably no policy area more important than that of the Bank of Canada. It is only right that this institution should be subject to more scrutiny.

If supply-chain shocks are to become common, shouldn’t Canada’s monetary policy take them into account? By repeatedly raising interest rates to bring inflation down, are we compromising the future of the country by damaging business startups, housing construction and the climate transition, as well as tangible and intangible investment such as human capital?

The time has come to demand greater transparency on the real impact of short-term and medium-term monetary policy on the economy and to amend the Bank of Canada Act.

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