Ontario and British Columbia premiers Doug Ford and David Eby, respectively, have issued letters to the Governor of the Bank of Canada, Tiff Macklem. In a concerted effort to influence the central bank’s forthcoming interest rate decision, they have counselled against any further rate increases. Ford’s missive, sent on a Sunday, emphasized the “crushing impact” additional rate increments would have on families and businesses. This sentiment echoes the Thursday letter from Eby.
Despite their concern, Christopher Ragan, an associate professor and founding director of the Max Bell School of Public Policy at McGill University, characterizes the premiers’ decision to send such letters as “unfortunate.” Ragan argues that injecting political elements into this debate is an inescapable consequence of such actions, and it is not hard to find others in support of maintaining the current interest rates.
While the Bank of Canada is an independent institution, deriving its mandate from the federal government and tasked with maintaining a two per cent inflation target, it is not immune to political pressure. Especially in recent years, it has faced torrential critiques as it navigates an economy scarred by a pandemic-induced decline, and later by uncontrolled inflation.
With the inflation rate still surpassing the two per cent mark, Jeremy Kronick, a monetary policy expert who heads financial and monetary policy research at the C.D. Howe Institute, emphasizes the central bank’s mandate. He points out that the bank does not design the mandate, which is a federal government agreement. In return, the bank must uphold its part of the agreement to return inflation back to a two per cent rate.
In the midst of these tensions, many predict that the central bank will hold the key interest rate steady as the economy braces against rising interest rates. The Bank of Canada remains silent on the letters from the premiers due to its elected “blackout” period before interest rate announcements.
From March 2022 onwards, the central bank has adopted an assertive approach towards interest rates to counter near-record inflation rates. However, recent economic indicators imply that the economy might be decelerating. The rising unemployment rate coupled with a sudden contraction in real gross domestic product in the second quarter have convinced many that the bank will hold its key interest rate at 5.0 per cent, the highest since 2001.
Opposition to the bank’s rate increases does not just come from the premiers, but also from labour groups and some policy makers who argue that the hardships imposed on workers far outweigh any benefits. Critiques have extended beyond partisan boundaries, with Conservative Leader Pierre Poilievre vowing to lay off Macklem if his party comes into power, while NDP Leader Jagmeet Singh condemns the Bank of Canada’s tactics to manage inflation.
Ragan suggests that while a dialogue should be encouraged about the Bank of Canada’s mandate, its daily operations should be free from political influence. The mandate outlines the target inflation rate and could potentially stipulate institution priorities. Despite the lively discourse surrounding the bank’s decisions, Ragan advises elected officials to channel their energies towards shaping the mandate, after which the bank should be entrusted with executing its responsibilities autonomously.
