MNI: BOC Needs Better Legal Protection Of Its Autonomy-CD Howe

The Bank of Canada needs better legal protection of its autonomy that further limits a government's ability to issue monetary policy orders or control how balance sheet losses are handled, according to a CD Howe paper written by former central bank advisers and obtained by MNI.

The Bank of Canada Act should explicitly allow the central bank to keep more of its earnings to guard against the kind of losses recorded after it used QE for the first time during the pandemic, according to the paper, due for publication Tuesday. There are currently CAD9 billion of losses and ambiguity in the current law leaves the Bank open to political pressure, the authors note. 

Losses have drawn skeptical questions for Tiff Macklem from Conservative lawmakers, and party leader Pierre Poilievre wants to fire the Governor saying policies like QE fueled inflation after pandemic lockdowns ended. The idea of a removal has also been raised in the United States as President Donald Trump has repeatedly threatened to fire Fed Chair Jerome Powell, though such a move is unlike in Canada for now with former Governor Mark Carney's Liberals winning an election in April.

"The Bank of Canada’s operational independence cannot be taken for granted," wrote authors CD Howe's Jeremy Kronick, and former BOC advisers Steve Ambler and Thorsten Koeppl.

NUCLEAR OPTION NEVER USED

"Independence has come under threat, in particular following the inflation surge post-COVID, which is seen to have damaged central bank credibility," according to the Toronto-based think tank's paper. CD Howe runs a shadow monetary panel and this paper also took anonymous comments from former Governor David Dodge and former deputies Dave Longworth and John Murray. 

Federal law permits the Finance Minister to send the Bank Governor a directive if there is a major disagreement over economic policy, with the requirement Parliament is notified with in 15 days. The paper's authors argue that delay should be cut down and the law should require a motion to be debated in Parliament so other parties can weigh in. 

"Given today’s political environment, this middle-ground directive should come with increased scrutiny before coming into force, something we believe is missing from the current approach," the paper said.

A directive has never been issued and past Governors have signaled they would resign if given one. The power was created following the 1961 resignation of James Coyne after a government motion to remove him was defeated in the Senate, exposing a lack of clarity about who is responsible for monetary policy.

MISSION CREEP DANGER

Even today, Macklem is often criticized by opposition parties and provincial premiers who have no official say on interest rates. Some have said rates were too high at times in recent years, others too low. (See: MNI INTERVIEW: Job Losses To Rise Even With BOC Cut-Union Boss)

Another risk has emerged with the divide between Conservatives who call for a limited role keeping inflation at 2% and the last mandate review where language was added on seeking maximum employment if the inflation goal is being met, the authors noted. 

The next review of the Bank's policy agreement with the government is due in 2026 and are done every five years. (See: MNI INTERVIEW: Strip Job Language From BOC Mandate- Ex Fellow)

"The Bank of Canada is strongly independent, though its independence could be strengthened still further," the report said.