MNI INTERVIEW:BOC To Avoid Mission Creep Amid PQ Threat-Ambler

The Bank of Canada will be guilty of mission creep if it sets monetary policy more favorable to Quebec separatists calling to abandon the dollar, at a time when it already faces elevated risks of political attacks on its autonomy, Montreal economist and former bank adviser Steve Ambler told MNI.

The Parti Quebecois leads in recent opinion polls ahead of next year’s provincial election but their claims about the benefits of creating a local currency and central bank are overstated and may hurt their credibility, Ambler said. 

“If you start to get into what can the Bank of Canada do for Quebec, then that would be an example of mandate creep,” the retired Universite du Quebec a Montreal professor said. “The Bank of Canada has one main instrument, and what they can try and hit primarily is just the overall rate of inflation Canada-wide.” 

The Bank will likely stick to its plan to keep rates on hold after cutting to 2.25% from 5% Ambler said because inflation is on target and there is modest growth, even as Quebec's forest and aluminum industries are among the hardest hit by U.S. tariffs.

Ambler co-authored a paper saying the Bank needs better legal protection against government interference and said interventions from other provincial leaders like Ontario’s Doug Ford add to political risk. Tiff Macklem already faces pressure with the Conservative leader saying he would fire the Governor for the pandemic inflation burst, while U.S. President Donald Trump has repeatedly threatened to fire Jerome Powell.

The Bank would be better insulated against such pressure if legislation was changed to further deter a finance minister from ever invoking a power to direct monetary policy, and to give the Bank more control over earnings to cover any QE losses, Ambler said. 

GUARD AGAINST TRIVIAL REASONS

“We’re trying to guard against it being used for more trivial reasons,” Ambler said, citing a recent paper he co-authored for the CD Howe think tank. (See: MNI: BOC Needs Better Legal Protection Of Its Autonomy-CD Howe)

While a directive has never been issued since the law was changed after a Liberal government sought and failed to remove former Governor James Coyne in 1961, it now seems more likely to be deployed. “What happens south of the border sooner or later tends to filter to us; Trump has been making all sorts of noises lately” about firing Powell, Ambler said. He also pointed to Ontario's Ford and other premiers saying the Bank should have lowered rates faster after Covid lockdowns ended. 

The Bank declined comment on the PQ’s proposal, and the finance minister's office didn’t provide a response. Industry Minister Melanie Joly, who represents a Montreal district, told reporters Tuesday the PQ would hurt Quebeckers' purchasing power because any new currency would be tied to the province's smaller economy.

ANOTHER CUT UNLIKELY

Another protection against BOC mission creep is for next year’s mandate review to drop language about maximum employment if inflation is stable, Ambler said. “Flexible inflation targeting works well and continues to work well. We should stick with that.”

Fiscal dominance is a smaller risk in Canada than elsewhere because of its lower debt, Ambler said, but that may only be a matter of degree.

"When you have such low rates of economic growth and disastrous private business investment… you can’t afford deficits or the size of the deficit you can afford is much lower,” he said. “It’s a question of temptation or exerting at least implicit pressure on the Bank to keep interest rates low in order to help with financing the debt.”

The flat economy also means the Bank sticks to its view rate cuts are done because inflation is near target and the economy has enough support after the U.S. imposed tariffs. “They are at the bottom of the band for what they consider the neutral rate," Ambler said. "So it would have to be real economic weakness for them to cut again.”