MNI: Legislate BOC Inflation Goal, Former Deputy Wilkins Says

The BOC’s independence needs to be strengthened through reforms, such as enshrining the inflation target in legislation, former Senior Deputy Governor Carolyn Wilkins said, warning that global political pressures on central banks could spill over into Canada.

Autonomy was gained through institutional bargains rather than being set in law and that leaves it vulnerable even with a long track record of curbing inflation, she said during a weekend lecture at the Canadian Economics Association annual meeting in Montreal.

The Bank's first-ever use of QE during the pandemic raised new questions about accountability according to Wilkins, now working on a paper on the subject as part of her work at Princeton University. Future use of QE in Canada should come with a new framework that clearly lays out if asset purchases are being used to stabilize markets or support the economy, said Wilkins, who is also a Bank of England adviser.

INFLATION TARGETS

Canada was the first G7 nation to adopt an inflation target in the early 1990s and it renegotiates the price agreement with the government every five years. The next review will occur by the end of 2026. There has often been bipartisan support for Bank independence but that's no guarantee, Wilkins added. "Canada's framework is effective, but vulnerable to political interpretation," she continued.  

Some economists have said the Bank's mandate was watered down in the last review under former Prime Minister Justin Trudeau's government by adding language about seeking maximum employment when the inflation target is being met. Conservative Leader Pierre Poilievre wants to restore a single mandate and has threatened to fire Governor Tiff Macklem after blaming him for the post-pandemic inflation burst and for financing budget deficits. (See: MNI POLICY: BOC Secondary Debt Buys Curb Political Blowback)

Wilkins pointed to the Bank’s history as evidence that its autonomy could again come under threat, recalling the post-World War II period of fiscal dominance used to manage the government’s war debt, as well as politically motivated, and ultimately unsuccessful, attempts to remove former Governor James Coyne.

Today's threats include mission creep, public anger over perceived mis-steps such as a commitment to keep interest rates low during the pandemic, and the blurring of fiscal and monetary policy, alongside losses the Bank incurred due to QE, she added. 

"Independence matters more in a high-debt world... independence is not self-sustaining," she said. The Bank should work on clearer protocols for balance-sheet policy and for any future joint communications with the finance department like the ones made during Covid, she concluded.