MNI: BOC Touts Independence Amid Bigger Inflation, Trade Risks

BOC Governor Tiff Macklem said Tuesday central banks must keep their political independence because that helps control inflation in an era where prices are becoming less stable, and his country and Mexico are more vulnerable to recent swings in US trade policy.

"The world looks increasingly prone to shocks," Macklem said at an event market Banxico's centennial. "Headwinds that limit supply could mean more upward pressure on inflation going forward. And more frequent supply shocks could mean more variability in inflation."

"Hard choices and uncertainty increase the risk of public disappointment, frustration and criticism. That’s why it’s important for central banks to remain independent from the political process," Macklem said.

Trust in central banks was tested by the surge of inflation following the end of pandemic lockdowns, though the overall framework of keeping a 2% inflation target proved its worth, Macklem said. The Governor's remarks made no reference to the Conservative Party leader's call for Macklem's firing after inflation reached 8% or to Donald Trump's dismissal of deputy Lisa Cook and threats to remove Jerome Powell.

Keeping the public's trust is a continual challenge and officials must ensure that "what we can’t do is let increased volatility and elevated economic uncertainty sow doubts about our commitment to price stability," Macklem said. That job is complicated because monetary policy isn't well suited to fix structural changes in the global economy, and for Canada and Mexico in particular because of their close ties to trade with the US, he said. (See: MNI INTERVIEW: Surge Pricing Mandate Would Aid BOC- Andolfatto)

"Hard choices and uncertainty increase the risk of public disappointment, frustration and criticism. That’s why it’s important for central banks to remain independent from the political process," Macklem said.

The BOC has added deputies with more outside experience and begun holding press conferences after every rate decision to become more accountable, Macklem said. Officials are also dealing with wider inflation risks by using scenario analysis rather than one specific economic forecast, and by focusing on more current economic data, he said. 

"When the future is more clouded, we naturally put more weight than usual on recent data until we have a better sense of how the economy is responding to new shocks. And second, we put less weight on the base-case projection and more weight on the risks," he said. "This helps us understand how our policy decisions will hold up across a range of outcomes."