Analysis | Should the Bank of Canada's mandate be reviewed?
The Bank of Canada recently announced a sixth rate hike this year.
The prospect of a recession leads many to question the mandate of the Bank of Canada. If it is politically popular to blame the central bank as being responsible for some of our misfortunes, in fact it is healthy and entirely relevant to ask questions about its mission.
This mandate, which was renewed and slightly amended in 2021, is defined by the Bank of Canada Act. According to the agreement with the government, the central bank must promote price stability and a maximum sustainable level of employment. That said, its primary objective is to keep inflation low and stable over time.
And that's why Tiff Macklem, the Governor of the Bank of Canada, said in an interview with Economy Zone on Wednesday evening that he really had no choice but to act as he is doing now. There is no easy way to restore price stability, he said. I don't mean it will be easy. I understand that many Canadians are in debt. And rising interest rates will put more stress on them. This is something we are following closely.
The bank raised its key rate from 0.25% to 3.75% from March to October, a rapid and historic rise, which is not yet over although it seems to be coming to an end. This growth in rates is dragging down the economy. The real estate market is in decline and consumer and business spending is slowing, which makes Tiff Macklem say that his policy is working.
Bank of Canada Governor Tiff Macklem
We haven't seen big effects of interest rate hikes on inflation yet, the governor said. But you're starting to see the effects on the economy: on the housing market, for example, and major purchases. We see that interest rates are starting to reduce activity and this will reduce the upward pressure on inflation. So, I hope that soon we will start to see a drop in the inflation rate.
But this rapid rise in rates is leading us to recession according to several economists. It will not be a major contraction […], it will not be a major recession, made a point of specifying Tiff Macklem, who evokes a form of stagnation of the economy by next summer with a growth of the GDP around 0% for the next quarters.
Nevertheless, thousands of Canadians are dealing with rising rates that significantly reduce their ability to meet all of their financial obligations. And from May to September, Canada lost nearly 100,000 full-time jobs. Rate hikes, which aim to calm inflation, have other effects, financial and economic.
This is why the economist and senator Diane Bellemare is of the opinion that we must adopt a dual mandate as in the United States: we must, according to her, put on an equal footing the objectives of price stability and maximum employment. However, in Canada, the mention of employment occupies a less important place in the decision-making process of the bank.
In fact, in our country, it is up to the various governments and their fiscal policy to maintain a sustainable level of employment. While in the United States the commitment of the Federal Reserve is broader, in Canada we seem to be banking more on a form of harmonization between fiscal and monetary policies.
This approach may not be optimal. With the current mandate of the Bank of Canada, which is to act almost exclusively on inflation, governments find themselves taking actions that practically hinder the action of the central bank.
In fact, because the economy is slowing down, jobs are being lost, the cost of living is rising, we are currently seeing governments, in Ottawa and in several provinces, particularly Quebec, inject billions of dollars into the economy in the form of aid and checks. These are measures that can fuel inflation.
If the central bank took more account of the economic and employment situation, perhaps it would have raised its interest rates less quickly. Perhaps it could have acted well before March 2022, which would have had a less brutal effect on the growth of the economy. And governments might have been less inclined to want to intervene to send money to taxpayers.
The current, very particular situation invites us to question the work of the central bank and its mandate. Not only should Governor Macklem be asked questions about his handling of inflation for over a year, which I have done, but it is essential to confront the bank's mandate with the real economy.
The rise in rates is strong, brutal, its effect on inflation will take time to manifest itself. In the meantime, the economy is slowing down, people are going into debt, jobs are being lost.
Tiff Macklem accepts being criticized and questioned. It is clear that we are in a difficult period. Inflation is too high. The economy begins to slow down. We have raised interest rates sharply. Canadians and elected officials have a lot of questions for us and it's easy to understand. We welcome comments and questions.
NDP Leader Jagmeet Singh is calling for a review of the mandate of the Bank of Canada, which he says is partly responsible for the recession that is announced in Canada because of too radical measures.
In a letter sent to Prime Minister Trudeau, Jagmeet Singh denounces recent remarks by Governor Macklem who advised companies not to include higher wages in contracts with their employees, despite the fact that wages are far from keeping pace with the 'inflation.
This one-size-fits-all solution to inflation, he writes, is already laying the groundwork for a recession and making life difficult for most people, especially working families and people on fixed incomes, such as seniors and people with disabilities. Does the government believe that the Bank's recent actions – dramatically raising interest rates and thereby undermining employment – are consistent with the goal of maximum sustainable employment?
The leader of the NDP asks a fundamental question, which deserves to resume the debate. Inflation hits the poorest in society particularly hard, but sharp interest rate hikes also have a major effect on the financial health of millions of households across the country.
The criticism of Jagmeet Singh, it should be noted, is quite different from that of Pierre Poilievre, the leader of the Conservative Party, who promised to fire Tiff Macklem if he becomes Prime Minister of Canada.
For Pierre Poilievre, the central bank has acted as the government's ATM during the pandemic, cryptocurrencies represent a remedy against inflation and people must be given the freedom to choose their own currency without the Bank of Canada being able to intervene to print money and devalue currency. These comments are misleading and have nothing to do with the essential and necessary debate that we must have on the mandate and objectives of the Bank of Canada.
The Conservative Leader, Pierre Poilievre
That said, we can't demand silence on the work of the Bank of Canada. For the Minister of Health Jean-Yves Duclos, we cannot question the credibility of the central bank. Elected officials must do everything, according to him, to maintain the ability of the central bank to do its job.
While it is true that Pierre Poilievre's comments raise some unease about respect that the leader of the Conservative Party has for the country's institutions, it is healthy, as Diane Bellemare or Jagmeet Singh have done, to question the work of the central bank and the need to plunge the economy into recession to lower inflation.