Opinion: Freeland must tread carefully in debate on Bank of Canada’s inflation mandate

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Deputy Prime Minister and Finance Minister Chrystia Freeland raises during question period in the House of Commons on November 25.Adrian Wilde/The Canadian Press

At a news conference last week, a reporter asked Chrystia Freeland if she had any thoughts on a pressing issue she’d have to tackle before the end of the year: a five-year renewal of the Bank of Canada’s inflation-targeting mandate.


Even before the question was over, a smile floated on the face of the Finance Minister.

“I have several views on that issue,” she said (before quickly refusing to reveal any of them).

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Why Ms Freeland was so pleased with the question, and why she was so secretly enthusiastic in her answer, was not clear. Perhaps this was an opportunity to dispel the impression that his boss, Prime Minister Justin Trudeau, does not care about such matters.

“When I think of the biggest, most important economic policy that this government, if re-elected, will go forward, you’ll forgive me if I don’t think of monetary policy,” Trudeau said recently. During his election campaign, he said – an announcement that has since been ridiculed by his political opponents. His finance minister appears to have wanted to make it clear that the government is focusing more on the matter than Mr Trudeau’s comments might have suggested.

Or maybe Freeland was indicating that the government’s renewal of the Bank of Canada’s five-year mandate – the underlying principle that the bank applies when deciding on interest rates – this time is much more than the usual rubber-stamping. Will happen. Five years of the bank’s longstanding two percent inflation target. Perhaps Freeland is ready to step into the debate about the central bank’s monetary policy-making framework like no Canadian government has in decades.

If so, that would be a drastic step. It seeks to strike a delicate balance of government influence without undermining the independence of the central bank.

It would certainly be appropriate for the government to exercise at least some of its power in this process, even if previous governments have opted to keep a greater distance.

After all, we are in a pivotal economic moment in which fiscal and monetary policy has played and continues to play a major role. And in the framework built around the Bank of Canada to secure its independence from the political arena, it is actually only one of two windows given to the government to influence the direction of monetary policy (the other being the appointment of a new governor). while doing it). If it doesn’t engage itself in tough questions related to the bank’s mandate now, we’re five years away from the next opportunity.

What’s more, the bank itself has opened this mandate renewal process to more rigorous scrutiny and outside input than usual. It has gone through a very public, multi-year review process of its inflation target, and has set out for debate on several options for possible revisions. In doing so, it has practically invited the government to play a more active role in the final decision than before.

Still, there is a danger that the government could delve too deeply into this fray for the wrong reasons – most of which are political.

With Ottawa rhetoric around inflation, and Mr Trudeau regularly accused of undermining the role of policy by failing to create or solve the problem, the central bank is tempted to do something to prove it. Maybe his government isn’t sleeping on an inflation-fighting switch.

The government may also be tempted to align the central bank’s policy-making objectives more closely with its own – for example, to include full, inclusive employment, or climate objectives in addition to prioritizing inflation. widen.

On the other hand, Mr Trudeau and his allies are under pressure from the Conservative opposition to take a tougher stance on the inflation battle and set the bank on a 2-per-percent inflation target. The government probably wants to do this to show its critics that it is not soft on inflation.

The most likely options on the table at this final stage are to either leave the mandate alone (perhaps with some slight variation around the language the bank interprets the 2-cent target), or switch to a dual mandate that adds to the mix. For a full-employment purpose. The bank itself has long said the bar has been set high to justify any change, but recently it has been increasingly open to adding an employment component. It is difficult to say which side the bank is leaning towards.

As Ms. Freeland herself noted, the Bank of Canada has put a lot of time and resources into assessing the options. If the government now makes this decision in a big way, it will invalidate a multi-year public process, and raise red flags about how independent the central bank is from this government.

So the minister should tread carefully. He has an important and legitimate role in the final decision. But compromising the independence of the central bank would do more harm than any political motive.

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